Introduction to Financial Accounting

Based on IFRS
Version 3.1

Chapter 1
Introduction to Financial Accounting

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 Chapter 1 Learning Objectives

LO1 – Define accounting.

LO2 – Identify and describe the forms of business organization.

LO3 – Identify and explain the Generally Accepted Accounting

Principles (GAAP).

LO4 – Identify, explain, and prepare the financial statements.

LO5 – Analyze transactions by using the accounting equation.

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 A. What is Accounting?
LO1 – Define accounting.

 What is accounting?
 A process that identifies, measures, records, and reports on a
business’s economic activities to various users
 Two areas of accounting are managerial accounting and
financial accounting
 Who are the users?
 Internal users – i.e. management – managerial accounting
 External users – i.e. investors, creditors, customers, and
labour unions – financial accounting
 What is financial accounting?
 An area of accounting that focuses on external reporting for
external users

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 B. Business Organizations
LO2 – Identify and describe the forms of business organization.

 What are the types of organizations that use

accounting information?
 a business organization sells products and/or
services for profit
 a non-business organization does not have profit as
a goal; hospitals, schools or charities serve the
needs of society
 Three types of business organizations:
 a proprietorship, a partnership and a corporation

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 Proprietorship
 Proprietorship characteristics:
 a business that is owned by one person
 not a separate legal entity
 business profits are included in the owner’s personal tax
return
 unlimited liability with regard to debts owed by the
business
 are often small businesses

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 Partnership
 Partnership characteristics:
 a business that is owned by two or more individuals
 not a separate legal entity
 owners are subject to unlimited liability with regard to
debts owed by the business

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 Corporation
 Corporation characteristics:
 a business that is owned by one or more individuals, called
shareholders, where ownership is in the form of shares
 a separate legal entity
 files its own tax return
 liability of owners is limited to their investment in the
corporation

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 Corporation
 Corporation characteristics - continued:
 shareholders can own any number of shares. The number
of shares held by a shareholder represents how much of
the corporation they own
 a corporation can have different types of shares such as
common shares and preferred shares.
 common shares can be privately held or publically traded
 shareholders from larger corporations are represented by
the Board of Directors and daily management is delegated
to officers of the corporation

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 Corporation

Generalized Form of a Corporate Organization

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 C. Generally Accepted Accounting Principles
LO3 – Identify and explain Generally Accepted Accounting Principles
(GAAP).

Generally Accepted Accounting Principles (GAAP):

Two standards in Canada:
 International Financial Reporting Standards
(IFRS) for publically-traded corporations
 Accounting Standards for Private Enterprises
(ASPE) for privately held corporations.

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 Qualitative Characteristics
 Accounting practices are guided by qualitative
characteristics and principles
 Six qualitative characteristics:
1. Relevance – ability to make a difference
2. Faithful representation – complete, neutral, free
from error
3. Comparability – utilizing similar accounting practices
4. Verifiability – financial reports logically flow from the
data and are reproducible
5. Timeliness – financial reports are available in time to
be useful to decision makers
6. Understandability – information is clear and concise
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 Accounting Principles
 Nine principles - general rules and concepts that
govern the field of accounting:
1. Business entity – each economic entity maintains
separate records
2. Consistency – a business uses the same accounting
policies and procedures from period to period
3. Historical Cost – each economic transaction is based
on the actual original cost
4. Full disclosure – accounting information is sufficient
to make knowledgeable decisions
5. Going concern – assume that the business will
continue into the future

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 Accounting Principles
 Principles – continued:
6. Matching – financial transactions are reported in the
period occurred/realized
7. Materiality – applies to items that are significant
enough to affect decisions made by users
8. Monetary unit – financial information expressed in
stable units of money
9. Recognition – revenues are recorded when earned
and expenses are recorded when incurred

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 D. Financial Statements
LO4 – Identify, explain, and prepare the financial statements.

The income statement reports revenues and

expenses during the period.

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 Financial Statements (cont.)
The statement of changes in equity reports changes in
the share capital and retained earnings during the
period.

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 Financial Statements (cont.)
The statement of financial position reports assets,
liabilities, and equity at a point in time.

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 Financial Statements (cont.)
The Statement of Financial Position is the basis
for the accounting equation
Assets = Liabilities + Equity
$22,100 = $10,100 + $12,000

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 Financial Statements (cont.)
The statement of cash flows reports changes in
the cash balance during the period
 This statement will be covered in detail later in
the course.

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 Financial Statements (cont.)
Notes to the financial statements accompany the
financial statements and provide greater detail
about the various items and amounts shown in the
financial statements.

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 Sources of Financing
 Internally generated funds from profits retained
by the business

 Acquiring debt from creditors

 Issuing share capital to investors

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 E. Transactions Analysis
LO5 – Analyze transactions by using the accounting equation.

Accounting Equation:

Assets = Liabilities + Equity

(economic resources (creditors’ claims (owners’ claims
owned by an entity) on assets) on assets)

Typical Accounts:

Debits = Credits
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 Transaction Analysis
Three steps to analyze each transaction:

1. Determine which accounts are affected

2. Determine if the account has increased or

decreased (+/-)

3. Record the entry

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 Transaction Analysis
1. Determine which accounts are affected
ASSETS ACCOUNTS:
 cash – coins, currency, bank accounts, petty
cash
 accounts receivable – amounts owed by
 customers
 prepaid expenses – goods or services paid in
advance and are expensed as consumed
 property, plant, and equipment – assets that
provide benefits for the current year and
beyond
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 Transaction Analysis
1. Determine which accounts are affected (cont.)
LIABILITY ACCOUNTS:
 bank loan – an obligation to repay cash in the
future to the bank
 accounts payable – obligations to repay
suppliers for goods and/or services
 unearned revenue – advance payment of cash
from a customer for goods and/or services
not yet provided

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 Transaction Analysis
1. Determine which accounts are affected (cont.)
EQUITY ACCOUNTS:
 share capital – amounts invested by
shareholders as owners of the business
 retained earnings – the sum of all net
income/losses over the life of a business, less
any dividends declared

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 Transaction Analysis
2. Determine if the accounts have increased or
decreased (+/-)
Assets = Liabilities + Equity

Debits must always equal Credits

The accounting equation must always balance
for every transaction.

Debits Credits

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 Transaction #1
3. Record the entry

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 Transaction #2

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 Transaction #3

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 Transaction #4

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 Transaction #5

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 Transaction #6

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 Transaction #7

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 Transaction #8

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 Transaction #9

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 Transaction #10

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 Transactions Worksheet

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Big Dog Carworks Corp. Income Statement and Statement of Financial Position

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Big Dog Carworks Corp. Statement of Changes in Equity

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 Financial Statements
Accounting Time Periods:
 Annual financial statements are prepared at the end
of each fiscal year

 Some companies prepare interim financial

statements, usually monthly or quarterly

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 References
All clip-art was retrieved from http://openclipart.org on
July 21, 2016.

Slide 5: http://openclipart.org/detail/234419/little-shop-with-sign-fixed
Slide 6: http://openclipart.org/detail/120691/business-people-siluete
Slide 7: http://openclipart.org/detail/223107/business-meeting
Slide 10: http://openclipart.org/detail/219063/injustice
Slide 20: http://openclipart.org/detail/182517/paper-notes
Slide 26: http://openclipart.org/detail/544/balance-scale (modified)
Slide 41: http://openclipart.org/detail/78169/officenotesline-drawing

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