ACC100 chapter 1-3

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Jun 19, 2024

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Introduction to accounting Chapter 1 - introduction to accounting What is a business? The activity of making, buying, or selling goods or providing services in exchange for money. Business sectors: Primary : where we grow and gather raw materials (potato farm, oil drilling). Secondary : where raw materials are turned into products (car manufacturing, frozen food factory). Tertiary: where goods and services are sold to consumers (restaurants, hairdressers). What is our focus? In this course our focus will be the tertiary sector, concentrating first on retailers and then on wholesalers. A retailer earns a profit by reselling goods or providing services to consumers (also called the public) in order to satisfy their wants and needs. A wholesaler buys large quantities of goods from manufacturers, warehouses them, and then resells them to retailers. Wholesalers do not sell to consumers (the public). Who cares about a business and why? Stakeholders care about a business. Stakeholders are individuals or groups who either affect the business or are affected by the actions of the business. All stakeholders have objectives , something they want from their relationship with the business. Stakeholders can be either internal or external. Internal stakeholders work for the business. Their objectives generally relate to their ability to keep their jobs, do their jobs more efficiently, get promoted, and get paid for their work. External stakeholders are outside of the business and their objectives generally relate to decisions they will make about money (also called resource allocation decisions) or about how the business can affect them, either positively or negatively. Internal Stakeholders: Stakeholder What They Want General Employee Earn high wages and keep their jobs

Marketing manager Effect of advertising (marketing campaigns) Company lawyer Ensure laws are followed Tax manager Ensure taxes are minimized and tax laws are followed Owners (or sole proprietor) Maximize profit, grow/expand the business External Stakeholders: Stakeholder What They Want Shareholders (of a corporation) Decide to invest or not invest, earn income from their investment Governments Ensure businesses pay taxes, employ more people, follow laws Customers Buy quality products at low prices, get the best warranties on products or services Suppliers Sell products/services to the business, get paid on time and in full Creditors (banks) Decide whether to lend money and how much, ensure business repays loan plus interest on time Society/Community Employ people from the community, improve the standard of living, run their businesses in an ethical manner, reduce/eliminate any negative environmental effects of their business practices, support local charities Why is it important to know about stakeholders and their objectives? The financial information a business provides is often the key information that external stakeholders use to make decisions. By better understanding the stakeholders and their objectives we can better understand the need for financial information and how important it is that stakeholders can depend on that information for their decision-making. Recap You now know that businesses are either in the primary, secondary, or tertiary sector. Many businesses can be in more than one sector – for example, Imperial Oil is in all three sectors: it

explores and drills for oil and gas, has refineries that create products from crude oil and gas, and also has service stations that sell those products to consumers. This book will focus on the tertiary sector; first retailers, then wholesalers. You also know that every business has stakeholders - individuals or groups that either affect a business or are affected by the decisions a business makes. Stakeholders have questions about the business they want answered so they can make decisions to help them meet their objectives. Stakeholders can be either internal or external to the business. What information do stakeholders use to answer their questions and make decisions? Companies record their business transactions in an accounting system: an information system that collects, groups, and communicates a business's financial position, including its financial health and profitability. Without accounting information, stakeholders would not be able to make many of the decisions that help them meet their objectives. Internal stakeholders have access to all the accounting information because they work in the business. They can use the accounting system to answer whatever questions they might have on a daily basis. External stakeholders do not have access to the business's accounting system because they are outside the business. Instead, they depend on the financial statements that businesses produce. Financial statements tell a business's story, what it does and how well it does it. They provide a business’s financial performance, its current financial position, and its cash flows. External stakeholders use the financial statements to analyze a business and answer questions, which allows them to make decisions and meet their objectives. What qualities must financial information have to make it useful for decision-making? We know that external stakeholders use financial information to make decisions that will help them meet their objectives. These decisions are often resource allocation decisions, meaning that their decisions often involve the stakeholder's money. For instance, a creditor might be deciding whether to give a loan to a business and an investor might be deciding whether or not to buy the business’s shares. Stakeholders can only make these kinds of decisions if the business provides them with the necessary financial information. Businesses are the preparers of the financial information, and stakeholders are the users. If you were a stakeholder making a decision, what qualities would you want the financial information to have? Would you want the information to be truthful? Comparable to other businesses so you can make a choice between them? Up-to-date information? In a format that is common to all businesses so you easily understand and compare it? All of these qualities are called qualitative characteristics: qualities that stakeholders want financial information to have so they can use the information for decision-making. Let’s look at each of the qualities that external stakeholders want. Quality: Description: Faithful Truthful, meaning it is complete, free of error, and neutral (unbiased). Relevant Applicable or pertinent to your decision-making, helps you predict the future and/or confirm decisions you made in the past.

Comparable Can compare the same business from year to year OR between two different businesses in the same industry. Verifiable Anyone looking at the information would determine similar amounts. Timely Information is provided quickly (as old information is less useful). Understandable Group and present information so it is clear and concise. Why is this important? In order to use information to make decisions it is important to understand the quality of that information (how trustworthy it is). If information does not have these qualitative characteristics then it may mislead the stakeholders, causing them to make wrong decisions. Look at the next "Check your understanding" to better understand why the quality of information provided is so important for decision-making. How are qualitative characteristics used to produce useful information? The qualitative characteristics are part of the standards (also called guidelines) accountants use to prepare financial information for external stakeholders. We know that information must be faithful, relevant, comparable, verifiable, timely, and understandable in order to be useful. It is sometimes difficult to apply these qualitative characteristics to the recording of financial transactions. As a result, the qualitative characteristics are used to develop assumptions that specify how accountants must record, measure, and report information. By following the qualitative characteristics and these assumptions, preparers of financial information ensure that financial information has the qualities that external shareholders need in order to use the information for decision-making. Assumption Description: Separate Entity Only the activities of the business are included in the business’s financial information. Unit-of-Measure All transactions must be reported using the same monetary unit. Usually this is the monetary unit of the country the business's head office is located in, even if the business has offices in many countries. Going Concern Businesses will continue their operations well into the future. Historic Cost All purchases will be recorded at the amount that was paid for them.

Time Period (Periodicity) Information is broken into artificial time periods such as a month, quarter or year, so that stakeholders can analyze and compare information to make decisions. Full Disclosure If something will affect the decisions of the external stakeholders, it must be reported. Why is this important? You saw from the example of the used car salesperson that it is impossible to make an informed decision unless the information provided can be trusted. When preparers use both the qualitative characteristics and the assumptions to record, measure, and report financial information, external stakeholders gain assurance that the information provided is useful for decision-making. How are the assumptions used? Previously in the chapter you saw how qualitative characteristics are used as a guide when recording and reporting the financial information of a business. Since the assumptions are based on the qualitative characteristics, and are used by preparers to correctly record, measure and report information, they also help preparers to ensure that the financial information has the qualities stakeholders need to make decisions. Putting it all together! The qualitative characteristics and underlying assumptions are part of generally accepted accounting principles, called GAAP (pronounced gap). Preparers of accounting information use GAAP as a guideline when preparing financial accounting information. The overall objective of GAAP is to provide financial information about a business that is useful to external stakeholders for decision-making. Chapter 2 - The accounting equation and transaction analysis How does financial data become financial information? Financial information is the end product of data processing. Once data has been categorized, analyzed, and formatted for presentation purposes it becomes information. What is financial information used for: useful for decision-making. What does the accounting system do? Is an information system that collects groups and communicates a businesses financial position including its financial health and profitability. What is the end result of a business's accounting system? The financial statements, they tell a businesses story, what it does, and how well it does it but What do we have to do in order to record the data? We use the accounting equation and its elements to record business activities.

Name the financial reporting elements: assets, liabilities, equity, revenue, and expenses. What will I learn in this chapter (2)? 1. What are the financial reporting elements, who uses them, and what for? 2. What is the interrelationship between the reporting elements? 3. How can you use your knowledge of the elements to solve for unknown numbers? 4. How can you use the elements to record basic business transactions? Why is financial information important? As you can see from the example of Tees Inc., both the preparers of financial information and the external stakeholders, the users, have objectives. The owners of Tees Inc. want a loan and they need to provide financial information to get it. The bank, an external stakeholder, wants financial information so it can decide on the amount of the loan as well as whether the loan, plus interest, will be repaid by the business. Both parties need financial information to meet their objectives. How do businesses produce financial information that is useful? Businesses are involved in thousands of business activities every day. These activities, when recorded, result in financial data. The problem is that financial data is not financial information. What's the difference? Information is the end product of data processing. Once data has been categorized, analyzed, and formatted for presentation purposes it becomes information which can be used for decision-making. Let's look at an example to make this concept clearer. Ryerson University collects data on all students applying to Ryerson's programs. Ryerson has huge amounts of raw data including name, address, date of birth, age, gender, nationality, high school attended, high school courses taken, grades received in every high school course, etc. Ryerson also has all that information, and more, for students who are presently enrolled in programs as well as for all students who have graduated. This data is useless for decision- making unless it's processed. Once processed (categorized, analyzed, and formatted), the data becomes information that can be used for decision-making. For instance, the information could indicate that students from specific high schools or students with both calculus and advanced functions are more likely to graduate from Ryerson's Business Management program. The data, once categorized, analyzed, and formatted for presentation purposes, becomes information that can be used to make decisions, such as adjusting future entrance requirements to improve student pass rates. In business, the process of changing financial data into financial information is carried out by the accounting system: an information system that collects, groups, and communicates a business's financial position, including its financial health and profitability. The end result of a business's accounting system is financial information in the form of financial statements. Financial statements tell a business's story, what it does and how well it does it. They provide a business’s financial performance, its current financial position, and its cash flows. External stakeholders use the financial statements to analyze a business and answer questions, which allow them to make decisions and meet their objectives. But we're getting ahead of ourselves. How do businesses use accounting systems to turn financial data into financial information so that financial statements can be produced? They use GAAP : generally accepted accounting principles.

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