ACC 100 Notes- Ahmed Saadeddine

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Toronto Metropolitan University *

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100

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Accounting

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Jun 13, 2024

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Multiple Choice Questions, Wednesday, April 17th Chapter - 1: 3 Business Sectors: - Primary : Grow and gather raw materials - Secondary: Raw materials turned into product - Tertiary: sell goods/services to consumers Stakeholders: People that can or do affect a business , they all have objectives - Internal Stakeholder: People who work for said business - General employees: Earn high wages to keep their jobs - Market Manager: Effect of advertising - Company Lawyer: Ensure laws are followed - External Stakeholder: Outside and money-oriented - Governments: Ensure businesses pay taxes, employ more people, and follow the law - Suppliers: Sell products/services to the business - Banks: Decide whether to lend money, ensure business repays loans on time *(The financial information that businesses provide is often the key info that ex stakeholders use to make decisions)* Qualitative Characteristics: Qualities that stakeholders want from financial information - Faithful: Info is trustworthy and unbiased - Relevant: Info is appropriate to stakeholders - Comparable : It’s consistent yearly and relative to other companies - Timely: Provided quickly as old information loses its value - Understandable: Info is clear and concise Assumptions: Underlie the preparation of financial information. - Separate Entity : Only business activities are included; personal activities are excluded. - Unit-of-Measure : All transactions are recorded using the same monetary unit. - Going Concern: Assumes the business will continue to operate for the foreseeable future. - Historic Cost: Transactions are initially recorded at the amount paid. - Time Period: Information is broken into artificial periods for analysis. - Full Disclosure: All relevant information that could impact decisions is disclosed. GAAP (Generally Accepted Accounting Principles ): - Guidelines used by accountants to prepare financial information . - Assure stakeholders about the usefulness of financial information for decision-making. **What to Know for Midterms or Final Exams:** - Define stakeholder, internal stakeholder, and external stakeholder. - List common internal stakeholders and their objectives. - List common external stakeholders and their objectives. - Explain what external stakeholders use to aid decision-making. - Define qualitative characteristics of financial information. - List and define each qualitative characteristic. - Define assumptions underlying financial information. - List and define each assumption. - Recognize the interconnection between qualitative characteristics and assumptions. - Apply knowledge of qualitative characteristics and assumptions to scenarios. - Define GAAP and explain its purpose. Example questions: Stakeholders Questions they may ask Q1. Tax advisor to business IS the business following required acc rules Q2. Marketing Manager What is the expected revenue from a new product Q3. Auditor in acc firm Are tax laws being followed Q4. Supplier Will businesses pay purchases on time Q5. Bankers Does the business have enough to pay interest?

Chapter - 2: ** What you need to understand for Midterms or Final exam** - Understand why financial information is crucial for both preparers and users of financial data. - Explain the distinction between data and information, with examples. - Define financial statements, identify who uses them, and explain their purpose. - List and define the financial reporting elements, providing examples for each element. - Categorize business activities into the appropriate financial reporting elements. - Explain the bond between the five financial reporting elements, with flowcharts or equations. - Define the double-entry accounting system and provide an example showing its application. - List the critical questions used to analyze every business activity, and demonstrate their application. - Use the definitions of financial reporting elements to support how business activities affect each element. - Record basic business activities into the accounting system using both the basic and expanded accounting equations. - Explain why increases in expenses and dividends are recorded differently in the expanded and basic accounting equations. - Analyze accounting information prepared by a business to answer questions about its financial position and profitability.54 Chapter 2 Financial Data: Any transaction made and recorded Financial Info: Taking data and analyzing and format Financial Statements: Tells the business story and how it currently is Accounting System: A system that takes data and turns it into financial position/health “GAAP” specifies how data is categorized, these are called elements that help desire issues/strengths. THE 5 ELEMENTS: - Assets: Owned benefits, * past events only - Liability: Owed money, future payment/past event - Equity: Capital plus earnings - Revenue: Income earned from goods/services - Expenses: Current costs Why is financial information important? It serves the objectives of both preparers and users. For preparers like Tees Inc., it's vital for obtaining loans and meeting financial goals. Meanwhile, external stakeholders, such as banks, rely on financial information to assess the viability of loan requests and make informed lending decisions. Essentially, financial information facilitates decision-making processes for all parties involved in financial transactions. The distinction between Information and Data: Data refers to raw, unprocessed facts and figures , such as the information TMU University collects on its students, including names, addresses, dates of birth, and grades. This raw data becomes information once it is processed, categorized, analyzed, and formatted for presentation purposes. For example, after processing the data, TMU may identify patterns indicating that students with specific high school backgrounds are more likely to succeed in certain programs . Financial information, presented as financial statements, provides insights into a business's financial performance, position, and cash flows, enabling stakeholders to make informed decisions. This transformation process illustrates the distinction between data, which is raw and unprocessed, and information, which is processed and actionable. - In other words, data is RAW, and information is PROCESSED AND ACTIONABLE.

What are Financial statements, who uses them and what is their purpose? - Financial statements : tell a business story, what it does, and how well it does it. balance sheets, income statements, cash flow statements, and statements of shareholders' equity. - Used by various stakeholders, such as investors, creditors, regulators, and internal management to asses businesses financial health. - The purpose of financial statements is to provide transparent and reliable information that aids stakeholders in evaluating the business's financial position, making informed decisions, and achieving their objectives. What are the Financial Reporting Elements? - Assets: - Owned, Benefit the company in the future, Happened in the past - *if you plan to purchase an asset it doesn't count* - EX. iPhone, computer, Cash - Liability: - Owed to third parties, Repaid in the future, Happened in the past - Either giving up cash, goods, or services in the future - *if you plan to borrow money next year it doesn't count* - EX. Student loans, Cell phone bills - Equity: Capital plus earnings - Wealth due to owners - Owners Capital - If you start with $20,000, you have that much capital - Profit Retained - A profit of $10,000 would increase PR. If paid out in the form of dividends of $2,000, Equity would increase by $8,000 which is profit that the business kept * Assets - Liabilities = Equity* - Revenue: - Income earned from goods/services (past tense) - Expenses: - Current costs - Helps u get revenue - EX. If you use gas in a lawnmower it is an expense because it helps generate revenue *Revenue - Expenses = Profit* Revenues Expenses Profit Q1 $132,450 $15,368 Q2 $239,600 $9,355 Q3 $249,000 $201,300 132,450 - 15,368 = Expenses (117,082) 239,600 +9,355 = Revenue (248,955) 249,000-201,300 = Profit (47,700) Expanded Accounting Equation Assets = Liabilities + Equity Equity = Owners Captial + Retained Earnings Retained Earnings = Profit - Dividends

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Profit = Revenues - Expenses +, +, -, - PRACTICE: 1) If expenses increase by $7,000, what happens to equity? Since revenue - EXPENSES, Equity will go down (owners capital) 2) The owners of a business contribute $50,000 each to a business. During the year the business had costs ( expenses) of $89,560, paid dividends of $10,000 , and earned revenues of $114,230 . What is equity at the end of the year? Owners cap: $50,000 x 2 = $100,000 Expenses: $89,560 Dividends: $10,000 Revenues: $114,230 Rev - Expenses = Profit = $24,670 Profit - Dividends = Retained Earnings = $14,670 $114,670 A=Assets L=Liabilities E=Equity OC=Owners Cap RE= Retained Earnings P= Profit D=Dividends R=Revenue Ex=Expenses A = L + E E = OC + RE RE = P - D P = R - EX Chapter - 3 Active Analysis Questions Critical Questions: - What did the business get? - What did the business give away? Enhancing Questions: - What did the business earn? (Revenue) - What did the business use? Consume or incur? (Expense) - What does the business owe? (Liabilities or Owner’s Captial) Common Accounts ASSETS: Cash Asset Account - Owned - Future benefit - Due to past interaction - Receive Cash = + - Give away = - Accounts Receivable Asset Account - Legal right to get cash later - Sell on account = + - Collect Cash = - Prepaid Expense Asset Account

- Future expense(not yet) - Legal right to collect in the future - Get future legal rights = + - Use up your right= - EX. Insurance, Rent, Subscription, and pre-paid advertisement that has not yet been released Office Supplies Asset Account - Future expense (not yet) - Receive in the past - Use in the future - Receive = + - Use = - Equipment Asset Account - Future expense (not yet) - Receive in the past - Use in the future - Receive = + - Use = - Intangible Assets Asset Account - Receive in the past - Use in the future - Legal right that businesses had to benefit them - Receive = + - Use = - EX. Patents, licenses, copyrights LIABILITIES Accounts payable Liability Account - Owed - Paid in the future - Due to a past transaction - Buy on account = + - Pay off = - Other Payables Liability Accounts are ALL - Owed - Paid with cash in the future - Due to past transaction - Owed to others = + - Pay down with cash = - EX. Salaries, Wages, Rent, Income tax, Interest payable Loan Payable Liability Account - Owed - Paid in the future - Due to past BORROWING - Borrow money = + - Pay off money = - EX. Bank loan, note, mortgage Unearned Revenue Liability Account

- Owe a good or a service - Provide in the future - Due to receiving cash in the past - Receive Cash = + - Provide good or service = - EQUITY Owner’s Capital - Money invested by owners - Represents ownership - Receive ownership = + Retained Earnings - Profit generated by business - Dividends paid to owners - Profit generated: + - Dividends paid: - REVENUES Earned - Provided a service - Delivered a good - PAST tenses, done deal - Earned: + - Returned: - Service Revenue Revenue Account - Provided services - Past transaction - Provided: + - Refunded: - Sales Revenue Revenue Account - Delivered Goods (inventory) - Past transaction - Delivered: + - Returned: - EXPENSES Advertising Wages Insurance Interest Income Rent TRANSACTION VS EVENT Transaction: Recorded in the business financial system - Measurable - $ amount known - Realized - Exchange already occurred Event: Never recorded (No entry) - Measurable OR Realized

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Chapter - 4 Financial Statements provide a business story, what they do, and how well they do it How is an income statement structured? What questions does it answer? What does the statement of retained earnings look like and how is it used How is the balance sheet created? How is it interconnected with the other statements? what questions does it answer? What is the statement of the cash flows and why is it a required statement? INCOME Statement - Reports results of day-to-day operations - Revenues (Must be earned income) - Expenses ( Used or Consumed to earn revenue) - Net Income or Loss - Measures performance over some time - Displayed from highest $ to lowest $ - If expenses are greater than income, the NET loss is displayed at the bottom PRACTICE PROBLEM Investors are interested in a company’s past performance because it helps them… A) Determine the amount of debt the company currently has B) Find the current value of the company’s property, plant, and equipment C) Predict the future profitability of the company D) Predict whether the company will be profitable enough to repay its obligations C) because INVESTORS want to know if the company will make money so they can have benefits ROI (Return on investment).

RETAINED EARNINGS - Stakeholders assess the use of net income - Amount retained vs distributed to owners What is equity? - = to wealth due to owners - Owners capital, share capital, contributed capital - Net income retained - Owed to owners by the business - Focuses on how the retained earnings component of equity is determined Starts at the beginning of the year Net income from the income statement is added Deduct dividends

How do investors use the statement of retained earnings? - Investors use past dividend payouts to predict future dividend payments - Is the company reinvesting enough profit to support future growth - Lenders use it to ask are dividend payouts reasonable, leaving enough cash to repay debts - Other creditors ask if the company is reinvesting enough profit to ensure future growth. BALANCE SHEET - Reports the resources owner (assets), claims against those resources (liabilities and equity) - ELEMENTS: Assets, Liabilities, Equity Asset on the balance sheet - Current & Long-term - Current: converted into cash, sold or used within a year *EX. Cash, Short term investments. Accounts receivable, prepaid expenses* - Long-term: Not a current asset, benefits realized over more than a year * EX. Long- term investments, property, plant, equipment, intangible access, and other assets.* Liabilities on the balance sheet - Current & Long-Term - Current: settled and one year *EX. Accounts payable, salaries, interest, unearned revenue.* - Long-Term: Settles beyond one year *EX. Mortgage, loan.* CHECK YOUR UNDERSTANDING The right to receive money in the future from a customer is A) Asset ( Accounts receivable) B) Liability C) Equity D) Revenue E) Expense Example of Balance sheet The balance sheet is at a POINT in time - Changes with each transaction

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All of these are on the same balance sheet NOTE: Shareholders' equity is often simply called EQUITY and the total is called Total Equity CHECK YOUR UNDERSTANDING The balance sheet would NOT include which of the following accounts? A) Office Supplies B) Unearned Revenue C) Capital Contributions D) Customer lists E) Prepaid Insurance Uses of Balance Sheet - Investors , ask can the company repay its debts as they come due, both short and long- term. - For Creditors , ask if there are enough assets available to operate the business - If the company had to sell everything would it cover their debts? - Are there enough sources of cash to pay debts? - Considering the current debt level, should we lend more money to the company? - For Investors and lenders , ask does the company uses mainly debt or equity financing? (By comparing total liability to total equity!)

BUSINESS ACTIVITIES: Financing: - Debt financing: Borrowing money - Sell shares: Equity financing - Raise or Repay capital Investing: - Purchase and selling of long-lived assets of property, plant, and/or equipment Operating: - Operate your business - Earn revenues - Incur Expenses (EX. paying salaries, rent) CHECK YOUR UNDERSTANDING The sale of an old computer would be which of the following activities? A) Operating Activity B) Investing Activity C) Financing Activity D) Both A and B E) Both A and C Dividends of $100,000 are paid out to shareholders A) Operating Activity B) Investing Activity C) Financing Activity D) Both A and B E) Both A and C A payment of $250,00 is collected from customers A) Operating Activity B) Investing Activity C) Financing Activity D) Both A and B E) Both A and C Paying $20,000 to renovate a store A) Operating Activity B) Investing Activity C) Financing Activity D) Both A and B E) Both A and C CASH FLOW - Shows management of cash, inflows of cash, and outflows of cash - Uses the cash basis of accounting - If it doesn't involve cash, it doesn't go on Cash flow Financing: getting and repaying funding ( debt or equity ) Investing : Buying and selling long-lived assets Operating: Revenues and expenses from the day-to-day operations Uses of cash flows Owners: is there enough cash to pay dividends Lenders: is there enough inflows of cash to pay debts? Will the business need additional financing in the future? Owners, lenders & other creditors: Asses the business’s ability to produce future cash inflows CHAPTER - 5

Introduction to Merchandising Businesses - Definition: Merchandising businesses purchase products from other companies to resell to consumers. - Focus: Buying and selling inventory, often using multi-step income statements. Differences Between Service and Merchandising Companies** - Service businesses offer services rather than physical products. - Revenue source: Services provided rather than product sales. Inventory Systems: Perpetual vs. Periodic - Perpetual: Records every purchase and sale of inventory immediately. - Periodic: Records inventory purchases but not sales until a physical count is done. Recording Inventory Purchases (Perpetual System) - Inventory accounts increase with purchases. - Cost of Goods Sold (COGS) recorded with each sale. Recording Inventory Sales (Perpetual System) - Sales increase cash and Sales Revenue accounts. - COGS increases with each sale, decreasing inventory. Income Statements: Single-step vs. Multi-step - Single-step: Simple, doesn't differentiate between revenue types. - Multi-step: Provides detailed breakdowns of revenues and expenses. Calculating Gross Profit Margin and Profit Margin - Gross Profit: Selling price minus cost, before other expenses. - Gross Profit Margin: Gross profit divided by sales revenue, expressed as a percentage. - Profit Margin: Net profit divided by sales revenue, also expressed as a percentage. Perpetual Inventory System - Records purchases and sales immediately, aiding in inventory management. Credit Terms and Accounts Payable - Buying on account involves credit terms, such as n/30. - Accounts Payable records liabilities for future payments. Shipping Terms: FOB and Freight - FOB Shipping Point: Ownership transfers at shipping; buyer pays freight. - FOB Destination: Ownership transfers at delivery; seller pays freight. Understanding Freight Costs - Freight IN adds to inventory costs. - Shipping terms impact inventory ownership and costs. Discount Terms and Payment Dates - Discount terms like 2/10, n/30 offer early payment incentives. - Payments must be made by specified dates to avoid interest. 2 = discount, 10 = days Handling Returns and Other Considerations - Recording returns, adjusting inventory and revenue accounts. - Other factors include inventory protection during transit and customer service. Final Thoughts on Merchandising Businesses - Merchandisers balance inventory management, sales, and expenses for profitability

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CHAPTER - 7 Accounts Receivable: Represents money owed to a company by a customer for goods or services. Allowance for doubtful accounts: Estimation of the amount of accounts receivable, that may not be collected due to customer defaults. Bad Debt Expense The expense associated with the portion of accounts receivable is estimated to be uncollectible. Pros and Cons of selling on credit (paying for it later)(AR) Pros: - Increased sales: Attracts more customers and boosts sales - Competitive Advantage: Can make a company’s offerings more attractive compared to competitors demanding upfront payments Cons: - Cash Flow Issues: Selling on credit can delay cash inflows impacting liquidity (ability to convert assets to cash or acquire cash) - Risk of Non-Payment: There’s always a risk that customers will default, leading to bad debts. Write-off Method (Direct Write-off) A method where bad debts are recognized and written off against income at the time they are deemed uncollectable. This method distorts financial statements since revenue and related expenses might not be recognized in the same period. Allowance Method Estimating uncollectable accounts at the end of each period and recording an allowance. Ensures revenue and expenses are matched in the period which they incurred. Importance and Impact Understanding and managing accounts receivable and associated allowances for maintaining accurate financial records, ensuring healthy cash flows, and making informed business decisions EX. The company reviews the AR aging report and decides to tighten credit terms for customers with a history of late payments. CHAPTER - 8 Depreciation is a measure of the wearing out, consumption, or other loss of value of a depreciable asset arising from use, effluxion of time, or obsolescence through technology and market changes. Long-Lived Assets Assets that provide value to a business over multiple years. - Tangible Assets : Physical like buildings, machinery, vehicles. - Intangible Assets: Non-Physical like rights, trademarks, patents. Accumulated Depreciation The total amount of depreciation expense that has been recorded against a tangible long-lived asset. EX. A company depreciates the truck by 10,000/year, after 3 years of accumulated depreciation = 30,000

Depreciation Expense A portion of the cost of a tangible long-lived asset is allocated as an expense to each period the asset is used. EX. Annually, the 10,000 that the company records as the cost of using the truck is the depreciation expense Cost of a Long-Lived Asset All the money necessary to acquire the asset and prepare it for its use. Materiality Whether an item’s size is large enough to influence the decision-making of users of financial statements. Plays a role in how assets are recorded and depreciated. - Impact on GAAP(Generally Accepted Accounting Principles): If the cost of an asset is considered immaterial, it might be expensed in the period it's purchased instead of capitalized and depreciated Calculations for Depreciation - Straight-Line method: Allocates an equal amount of depreciation each year - EX. The delivery company truck, with a 50,000 cost and a 10,000 salvage value over a 5-year life, would have an annual straight line of 8,000. ( 50,000- 10,000/5) - Declining Balance method: Accelerates depreciation, recognizing more expense in the early years of an asset’s life. - EX. Using a double-declining balance method, the truck’s depreciation would be higher in the first year and decrease over the following years. - Units of Production method: Matches depreciation expense with the usage of the asset. - If the truck is expected to last 100,000 miles, and it drives 20,000 miles in the first year the depreciation expense for that year is based on the proportion of miles driven. The effect of Materiality on long-lived assets Whether to capitalize an asset or expense it immediately. This judgment can impact a company business reported income and asset values EX. For a large corporation, 2,000 computers may be considered immaterial and expensed in the year of purchase. For a small business, the same amount may be significant enough to capitalize and depreciate over the assert useful life. CHAPTER - 9 Liability Accounts Liabilities are obligations that a business owes to others, arising from past transactions or events. CURRENT (within 1 year) & LONG-TERM (After 1 year) Deferred Revenue Unearned revenue is money received by a business for goods or services that are yet to be performed. It’s a liability because it represents an obligation to provide a service in the future. Operating Line of credit vs. Traditional bank loan An operating line is a flexible loan from a bank that provides a business with a maximum borrowing amount for covering short-term financial needs. Interest is charged on the amount used. Traditional Bank loan provides a lump sum upfront, with a fixed repayment schedule and interest rate.

Interest Interest is the cost of borrowing money, it is an expense for the borrower and income for the lender. Fixed or variable. EX. borrows 10,000 at an annual interest rate of 5%, and pays back 500 in interest/year. Income Tax Payable Amount of income tax a company owes to the government but has not yet paid. Canada Pension Plan (CPP), Employment Insurance (EI), Employer Health Tax (EHT) In Canada, businesses withhold CPP and EI contributions from employee wages and make their contributions, EHT is a payroll tax paid to employers based on the total remuneration paid to employees. Managing Liabilities Proper management of liabilities is crucial for maintaining a healthy cash flow and ensuring long-term business sustainability. Strategies include timely payments to avoid interest and penalties, negotiating favorable terms, and balancing the use of debt with the ability to repay. Strategy Example: A business may decide to pay off high-interest debt early or refinance to a lower interest rate to reduce interest expenses. Impact of liability on financial health Necessary part of financing business operations and growth but must be carefully managed. Excessive borrowing of cash can lead to financial distress while prudent use of debt can facilitate expansion and profitability, CHAPTER - 10 Horizontal and Vertical Analysis These are two methods used to analyze financial statements, revealing trends and offering insights into a company’s performance over time or in comparison to industry standards. Horizontal : Also known as trend analysis, compares financial data across multiple periods, showing increases or decreases over time as both amounts and percentages. - EX. If a company's sales revenue increased from 100,000 in Year 1 to 120,000 in Year 2, horizontal analysis would show a 20,000 or 20% increase, indicating growth. Vertical: This method analyzes financial statements for a single period, it expresses each item as a percentage of a base figure, such as total assets or sales revenue, helping to understand the composition and proportions. - EX. In a balance sheet with total assets of 500,000, if cash is 50,000, vertical analysis shows cash as 10% of total assets, providing insight into the asset structure. Analysis of Statements of Cash Flows The statement of Cash flows categorizes cash activities into operating, investing, and financing activities. Financial Ratios Mathematical comparisons of financial statements accounts or categories. These ratios provide insights into the company’s liquidity, solvency, profitability, and operation efficiency. - Liquidity Ratios: (Current ratio, quick ratio) Measure a company’s ability to meet short-term obligations. - Solvency Ratios: (Debt to Equity ratio) Assesses a company’s long-term financial stability and debt management. - Profitability Ratios: (Return on Equity, Gross Profit Margin) Examining a company’s ability to generate earnings relative to sales, assets, and equity. - Efficiency Ratios: (Inventory Turnover, Receivables Turnover) Analyze how effectively a company uses its assets. Importance of Financial Statement Analysis

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Crucial for investors, creditors, and the company’s management as it provides a comprehensive view of financial health, trends, and operational performance. It informs decision-making regarding investments, credit lending, and strategic planning. - Strategic Decision Making examples: based on financial ratio analysis a company may decide to reduce debt levels to improve its solvency ratios or take measures to improve inventory management to boost efficiency ratios.

ACC 100 Notes- Ahmed Saadeddine

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