Kế toán, kiểm toán - Chapter 1: The purpose and use of financial statements

CHAPTER 1:THE PURPOSE AND USE OF FINANCIAL STATEMENTSLO 1: Identify the uses and users of accounting.LO 2: Describe the primary forms of business organization.LO 3: Explain the three main types of business activity.LO 4: Describe the purpose and content of each of the financial statements.LEARNING OBJECTIVESAccounting identifies and records the economic events of an organization and communicates to interested usersThere are two broad categories of usersInternal usersExternal usersUses and Users of AccountingInternal usersManage the company, non-profit, government organizationCompany officers, managers and directors in finance, marketing, human resources, productionExternal usersDo not work for the companyInvestors, lenders, and other creditorsCustomers, employees, labour unionsTaxing authorities and regulatorsUsers of Financial InformationIdentify the internal and external users of financial information for a local hospital.Discussion QuestionFor accounting information to have value, preparers must have high ethical standardsActions are legal and responsibleConsider organization’s interestsAccountants, other professionals, and most companies have rules or codes of conduct to guide ethical behaviour Ethical BehaviourWhat are some ethical issues that might exist for financial information in a local hospital?Discussion QuestionOwned by one person (proprietor)Simple to set upOwner has control over businessLimited lifeUnlimited liabilityIncome tax paid by ownerForms of Business Organizations: ProprietorshipSimilar to proprietorship except owned by more than one personFormalized in a written agreementLimited lifeEach partner has unlimited liabilityIncome tax paid by individual partnersForms of Business Organizations:PartnershipSeparate legal entity owned by shareholders (owners of shares)Indefinite lifeEase of raising capitalShareholders enjoy limited liabilityCorporation pays income taxMay be public or private:Public if shares are publicly tradedPrivate if shares are not available to the general publicForms of Business Organizations: CorporationsRules and practices for the preparation of financial statementsDifferent for publicly-traded and private corporationsPublicly-traded corporations use International Financial Reporting Standards (IFRS)Private corporations may use IFRS or Accounting Standards for Private Enterprises (ASPE)Proprietorships and partnerships generally follow ASPE for external reportingNot required to follow any particular standards for internal useGenerally Accepted Accounting Principles (GAAP)All companies are involved in all three activities:FinancingInvestingOperatingThree Types of Business ActivitiesObtaining (and repaying) funds to finance the operations of the businessSelling or repurchasing shares (equity)Borrowing money or repaying loans (debt)Forms of debtBank indebtedness, bank loans, long-term debt such as mortgages, bonds, finance leasesFinancing ActivitiesPurchase or sale of long-lived assets needed to operate the companyExamplesPurchase or sale of long-lived assets such as property, plant and equipment and intangible assetsPurchase or sale of investments, such as shares or debt securities of other companies Investing ActivitiesOperating activities are the main day-to-day activities of the businessExamplesRevenues (income)ExpensesRelated accounts such as accounts receivable and accounts payableOperating ActivitiesWhat are the potential operating, investing, and financing activities for a retail company? Would your answer differ for a service company?Discussion QuestionIncome statementReports revenues and expenses for a specific period of timeStatement of changes in equityReports the changes in each component of shareholders’ equity during a period of timeStatement of financial positionShows the assets, liabilities and shareholders’ equity at a specific point in timeFinancial StatementsStatement of cash flowsShows, for a specific period of time, how company obtained cash and how that cash was usedOrder of preparation of statementsFinancial Statements (continued)RevenuesArise from sales of a products or servicesResult in an inflow of assetsExpensesCosts of assets consumed or services used to generate revenuesNet Income (loss)= Revenues - ExpensesIncome StatementIncome Statement - ExampleShows the changes in each component of shareholders’ equity for the periodShare capitalAmounts contributed by shareholdersMay include common and preferred classesRetained earnings / deficitCumulative net income retained in the companyLess dividends paid to shareholdersOther shareholders’ accountsStatement of Changes in EquityChanges in sharesChanges in retained earningsStatement of Changes in Equity (continued)Statement of Changes in Equity - ExampleAssetsResources owned or controlled by a businessLiabilitiesClaims of lenders and other creditorsShareholders’ equityClaims of shareholdersAccounting equationAssets = Liabilities + Shareholders’ EquityStatement of Financial PositionSIERRA CORPORATIONStatement of Financial PositionOctober 31, 2018Statement of Financial Position - ExampleStatement of Financial Position – Example (continued)Reports the effect on cash of the company’sOperating activitiesInvesting activitiesFinancing activitiesShows net increase or decrease in cash for the periodStatement of Cash Flows SIERRA CORPORATIONStatement of Cash FlowsMonth Ended October 31, 2018Statement of Cash Flows - ExampleStatements are interrelatedResults from some statements are used as data in other statementsExamplesNet income from income statement is reported in statement of changes in equityEnding balances of each shareholders’ equity account is reported in both statements of financial position and changes in equityStatement of cash flows is related to statement of financial positionRelationships Between StatementsComparing IFRS and ASPECOPYRIGHTCopyright © 2017 John Wiley & Sons Canada, Ltd. 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