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Accounting - Chapter 1
Accounting - Chapter 1
Accounting - Chapter 1
Shows the income statement, statement of financial position linked through retained
earnings
The Statement of Cash Flows
Divides cash inflows, outflows divided into three categories: operating, investing, financing
Describes the causes of change in cash reported
Cash flows from operating activities: directly related to earning income
Cash flows from investing activities: related to the acquisition or sale of companys
productive assets
Cash flows from financing activities: related to the financing of company
Relationships among the Four Financial Statements
Profit from income statements increases retained earnings on statement of changes in equity
Ending retained earnings from statement of changes in equity is one of the three
components of shareholders equity on statement of financial position
Change in cash on cash flow statement added to cash balance at beginning equals cash at
the end
Management Uses of Financial Statements
Marketing managers, credit managers use customers financial statements to decide whether
or not to extend credit
Purchasing managers analyze of suppliers to judge whether suppliers can meet demands
Human resource managers, employees union use companys as basis for contract
negotiations, computing employee bonuses
Notes to Financial Statements
Provide information about financial condition of company
3 types: provides descriptions of accounting rules in statements, provides additional detail
about a line on financial statements, provides financial disclosures about items not on
statements
Responsibilities for the Accounting Communication Process
Effective communications means recipient understands what sender intended to convey
Need to know amounts reported fairly represent what is claimed
Decision maker needs to understand measurement rules based on IFRS(International
Financial Reporting Standards)
International Financial Reporting Standards (IFRS)
Foundations from Italian monk, mathematician, Fr. Luca Pacioli; Italian merchants account for
activities as owner-managers of business ventures
After stock market decline, Securities Act, Securities Exchange Act created Securities and
Exchange Commission (SEC) gave it powers for rules of financial statements; in Canada its
provincial: OSC (Ontario Securities Commission)
Current group is Accounting Standards Board (AcSB) of CICA; establish standards for
accounting
International Accounting Standards Board (IASB) independent standard-setting board
Accounting standards important to preparers and readers of statements
IFRS provides guidance to companies to best reflect results of operations
IFRS enhances comparability by limiting number of acceptable accounting methods
Enables external users to assess quality of information
By preparing statements incur economic consequences: changes to selling price of shares,
changes to bonuses received by management and employees, loss of competitive advantage
Management Responsibility and the Demand for Auditing
Management responsible for accuracy of statements; take important steps to assure records
are accurate: develop and maintain internal controls, hire independent auditors to attest to
fairness, form board of directors to oversee integrity of the two safeguards
Accountant may be a CA, CGA, or CMA; granted by professional accounting organizations
In audit: examines statements to ensure represent accurately
IFRS started in 2011; reports transitioned to meet proper balance of informed judgement in
compliance with IFRS
Publicly accountable enterprises (PAE) last to get IFRS down; trying to adapt to new
standards
OSC satisfied with results in 2011 first quarter
Needed large amount of resources to transition to IFRS
Pengrowth followed industrys long-established method of full-cost accounting: costs in
exploration, acquisition, development accumulated in pool of properties subjected to
depletion and impairment; IFRS required more granular capitalization of assets
Banks have reconciled financials since 2011; bank easily see potential for market reaction