Introduction to Financial Accounting: Concepts, Principles, and

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with Open Texts Intr oduction to Financial Accounting by Henry Dauderis & David Annand Edited by Athabasca University VERSION 2019–REVISIONA ADAPTABLE | ACCESSIBLE | AFFORDABLE *Creative Commons License (CC BY-NC-SA)

a d v a n c i n g l e a r n i n g Introduction to Financial Accounting by Henry Dauderis & David Annand Edited by Athabasca University Version2019 — RevisionA BE A CHAMPION OF OER! Contribute suggestions for improvements, new content, or errata: A new topic A new example An interesting new question Any other suggestions to improve the material Contact Lyryx at info@lyryx.com with your ideas. Lyryx Learning Team Bruce Bauslaugh Peter Chow Nathan Friess Stephanie Keyowski Claude Laflamme Martha Laflamme Jennifer MacKenzie Tamsyn Murnaghan Bogdan Sava Ryan Yee LICENSE Creative Commons License (CC BY-NC-SA): This text, including the art and illustrations, are available under the Creative Commons license (CC BY-NC-SA), allowing anyone to reuse, revise, remix and redistribute the text. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-sa/3.0/ Accoun ng involves a process of collec ng, recording, and repor ng a business’s economic acvi es to users. It is o en called the language of business because it uses a unique vocabulary to communicate informa on to decision makers. To understand accoun ng, we first look at the basic forms of business organiza ons. The concepts and principles that provide the founda on

for financial accoun ng are then discussed. With an emphasis on the corporate form of business organiza on, we will examine how we communicate to users of financial informa on using financial statements. Finally, we will review how financial transac ons are analyzed and then reported on financial statements. Chapter 1 Learning Objec ves LO1 – Define accoun ng. LO2 – Iden fy and describe the forms of business organiza on. LO3 – Iden fy and explain the Generally Accepted Accoun ng Principles (GAAP). LO4 – Iden fy, explain, and prepare the financial statements. LO5 – Analyze transac ons by using the accoun ng equa on. Concept Self-Check Use the following as a self-check while working through Chapter 1 . 1. What is accounting? 2. What is the difference between internal and external users of accoun ng informa on? 3. What is the difference between managerial and financial accoun ng? 4. What is the difference between a business organiza on and a non-business organiza on? 5. What are the three types of business organiza ons? 6. What is a PAE? A PE? 7. What does the term limited liability mean? 1 Chapter1 Introduc on to Financial Accoun ng

2 Introduc on to Financial Accoun ng 8. Explain how ethics are involved in the prac ce of accoun ng. 9. Describe what GAAP refers to. 10. Iden fy and explain the six qualita ve characteris cs of GAAP. 11. Iden fy and explain at least five of the nine principles that support the GAAP qualita vecharacteris cs. 12. How is financial informa on communicated to external users? 13. What are the four financial statements? 14. Which financial statement measures financial performance? Financial posi on? 15. What informa on is provided in the statement of cash flows? 16. Explain how retained earnings and dividends are related. 17. What are the three primary components of the balance sheet? 18. Equity consists of what two components? 19. How are assets financed? 20. Iden fy and explain the three types of ac vi es a business engages in. 21. What are notes to the financial statements ? 22. What is the accoun ng equa on? 23. What are the dis nc ons among calendar, interim, and fiscal year ends? NOTE: The purpose of these ques ons is to prepare you for the concepts introduced in the chapter. Your goal should be to answer each of these ques ons as you read through the chapter. If, when you complete the chapter, you are unable to answer one or more the Concept Self-Check ques ons, go back through the content to find the answer(s). Solu ons are not provided to these ques ons. 1.1. Accoun ng Defined 1.1 Accounting Defined Accounting is the process of identifying, measuring, recording, and communicating an organization’s economic ac vi es to users. Users need information for decision making. Internal users of accounting information work for the organization and are responsible for planning, organizing, and operating the entity. The area of accounting known as managerial accounting serves the decision-making needs of internal users. External users do not work for LO1 – Define accounting.

3 the organization and include investors, creditors, labour unions, and customers. Financialaccoun ng is the area of accounting that focuses on external repor ng and mee ng the needs of external users. This book addresses financial accoun ng. Managerial accoun ng is covered in other books. 1.2 Business Organiza ons An organiza on is a group of individuals who come together to pursue a common set of goals and objec ves. There are two types of business organiza ons: business and non-business . A business organiza on sells products and/or services for profit. A non-business organiza on , such as a charity or hospital, exists to meet various societal needs and does not have profit as a goal. All businesses, regardless of type, record, report, and, most importantly, use accoun ng informa on for making decisions. This book focuses on business organiza ons. There are three common forms of business organiza ons — a proprietorship , a partnership , and a corpora on . Proprietorship A proprietorship is a business owned by one person. It is not a separate legal en ty, which means that the business and the owner are considered to be the same en ty. This means, for example, thatfromanincometaxperspec ve, theprofitsofaproprietorshiparetaxedaspartoftheowner’s personal income tax return. Unlimited liability is another characteris c of a sole proprietorship meaning that if the business could not pay its debts, the owner would be responsible even if the business’s debts were greater than the owner’s personal resources. Partnership A partnership is a business owned by two or more individuals. Like the proprietorship, it is not a separate legal en ty and its owners are typically subject to unlimited liability. Corpora on A corpora on isabusinessownedbyoneormoreowners. Theownersareknownas shareholders . A shareholder owns shares of the corpora on. Shares 1 are units of ownership in a corpora on. For example, if a corpora on has 1,000 shares, there may be three shareholders where one has 700 shares, another has 200 shares, and the third has 100 shares. The number of shares held by a shareholder represents how much of the corpora on they own. A corpora on can have different 1 Shares are also called stock . LO2 – Identify and describe the forms of business organization.

4 Introduc on to Financial Accoun ng types of shares; this topic is discussed in a later chapter. When there is only one type of share, it is usually called common shares . A corpora on’s shares can be privately held or available for public sale. A corpora on that holds its shares privately and does not sell them publicly is known as a private enterprise (PE) . A corpora on that sells its shares publicly, typically on a stock exchange, is called a publicly accountable enterprise (PAE) . Unlike the proprietorship and partnership, a corpora on is a separate legal en ty. This means, for example, that from an income tax perspec ve, a corpora on files its own tax return. The owners or shareholders of a corpora on are not responsible for the corpora on’s debts so have limited liability meaning that the most they can lose is what they invested in the corpora on. In larger corpora ons, there can be many shareholders. In these cases, shareholders do not manageacorpora onbutpar cipateindirectlythroughtheelec onofa BoardofDirectors . TheBoard of Directors does not par cipate in the day-to-day management of the corpora on but delegates this responsibility to the officers of the corpora on. An example of this delega on of responsibility is illustrated in Figure 1.1 . Figure 1.1: Generalized Form of a Corporate Organiza on Shareholders usually meet annually to elect a Board of Directors. The Board of Directors meets 1.3. Generally Accepted Accoun ng Principles (GAAP) regularly to review the corpora on’s opera ons and to set policies for future opera ons. Unlike shareholders, directors can be held personally liable if a company fails. The focus of these chapters will be on the corporate form of business organiza on. The proprietorship and partnership organiza ons will be discussed in more detail in Chapter 13 . An explora on is available on the Lyryx site. Log into your Lyryx course to run Forms of Organiza on . SHAREHOLDERS (Owners) BOARDOFDIRECTORS (RepresentOwners) PRESIDENT VICE PRES. MARKETING VICE PRES. FINANCE VICE PRES. PRODUCTION Elect Appoint

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