Chapter 1

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What is accounting?

Textbook definition: Information system in which the underlying economic conditions of organizations are identified, recorded, and communicated to information users (e.g., investors)

1) Identification2) Recording (measurement)3) Communication

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Accounting process

1) Identification Accounting event vs. Economic event

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Apple Stock (AAPL) Dips After Steve Jobs' Death Oct. 6, 2011 By Susanna Kim

Shares of Apple Inc. (AAPL) fell at the close of trading on Thursday, the day after former CEO Steve Jobs passed away.

Shares fell about 0.7 percent to $375.75 at the opening bell then bounced back through the day. By 4 p.m. EST, the stock was $377.37, down 0.23 percent.

Apple shares fell 0.7 percent the day following Job's resignation on August 24. As Jobs' health began to fail from neuroendocrine cancer, he resigned as CEO and handed the baton to his long-time lieutenant and chief operating officer, Tim Cook. The 56-year old Jobs had led the company since 1996, after co-founding the company in 1976 and his ouster in 1985.

http://abcnews.go.com/Business/steve-jobs-death-apple-stock-aapl-dips/story?id=14680622

Q) CEO death, is this an accounting event?

A. YesB. No

Yes

No

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Accounting process

1) Identification Accounting event vs. Economic event

Q) Is this an accounting event? Employees love for a company Getting a new CEO CEO getting sick CEO death

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Accounting process 2) Recording (measurement)

Is it measurable? Quantifiable? Accounting event should be quantifiable.

Asset: Resources that a company owns or controls that will provide future economic benefits.

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Accounting process 3) Communication

Annual Report (e.g., Financial Statements)

Where do we find annual reports? Company website (investor relations) Sedar.com for Canadian firms Sec.gov for U.S. firms

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Annual Report Example

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Accounting process 3) Communication

Annual Report (e.g., Financial Statements)

Where do we find annual reports? Company website (investor relations) Sedar.com for Canadian firms Sec.gov for U.S. firms

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11

Auditor independence Auditors should conduct an independent examination of the

financial statements to determine whether they are presented fairly in accordance with IFRS.

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Q) Where do audit fees (paid to accounting firms) come from?

A. Government (from tax payers)B. Client firm

A. B.

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Q) Who has the top priority over operating earningsgenerated by a corporation?

A. B. C.

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A. Creditors (e.g., bank interest payment)B. Government (e.g., Tax payment)

C. Shareholders (dividend)

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Income StatementIncome Statement

Balance Sheet

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Statement of Changes in Equity

Note that Statement of Retained Earnings are included in this statement.

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Statement of Cash flows

[2013 final] What financial statement would reveal how much cash was generated from operating activities during a period of time?

A. Income statementB. Balance sheetC. Statement of owners equityD. Cash flow statement

A. B. C. D.

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Which company do you like better?

A. Company AB. Company B

Comp

any A

Comp

any B

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Company A)Operating cash flow: Financing cash flow: no changeInvesting cash flow

Company B)Operating cash flow: Financing cash flow: no changeInvesting cash flow:

Q) Is corporation a legal person?

A. YesB. No

Yes

No

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Forms of organization

Sole Proprietorship (unlimited liability) Partnership (unlimited liability, in general) Corporation

Advantage: limited liability (Owners are not liable for the debts of the firm.)

Disadvantage: double taxation

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Limited liability (page 557)

Shareholders cannot be made to pay for the companys liabilities out of their personal assets. They may lose the amount that they have invested in the shares of the company, but they will not lose more than their investment.

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[2013 final] What is the form of business organization in which all of the owners have limited liability?

A. Sole ProprietorshipB. PartnershipC. Corporation

A. B. C.

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Q) In general, can shareholders withdraw their investments from Corporation as they wish?

A. YesB. No

A. B.

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Q) What do shareholders get in exchange for contributed capital?

A. Interest incomeB. Dividend

A. B.

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