Instructor: Simon Magennis

1
 TOPIC 1:
CHAPTERS 1 & 2
Kimmel 9th Ed
Financial Accounting
Why am I taking this course? Accounting,
numbers…Uggh!
Accounting is the language of business.
Accounting is the “scorekeeping” function of a
business.
Accounting is at the heart of business.

3
What is a Business, and Why Study
Accounting?
A business is a legal organization that attempts to create
value by exchanging products with customers for money.
Accounting is the process of recognizing, measuring,
recording, and reporting information about a business’s
transactions.
Helps you understand business transactions.
Enables you to manage them successfully.

Helps you understand the financial statements; and

The language of accounting (and business)

4
Learning Objectives – Ch 1
LO 1: Identify the uses and users of accounting.
LO 2: Describe the primary forms of business organization.
LO 3: Explain the three main types of business activity.
LO 4: Describe the purpose and content of each of the
financial statements
(Note: Basics now, more detail later!)
Introduction to Business and Accounting
Important Reading:
(Look ahead to In-class case study)
Kimmel: Chaps 1 to 5
Annual Reports
 Financial Statements

6
LO 1: Users of Financial Information
Internal users
 Manage companies, non-profit, & government
organizations
 Company officers, managers and directors in finance,
marketing, human resources, production
External users
Do not work for the company
Investors, lenders, and other creditors
Customers, employees, labour unions
Taxing authorities and regulators

7
Ethical Behaviour
• For accounting information to have value, preparers
must have high ethical standards
– Actions are legal and responsible
– Consider organization’s interests
• Accountants, other professionals, and most
companies have rules or codes of conduct to guide
ethical behaviour

8
LO 1: Forms of Business Organization
Sole Proprietorship
Partnership
Corporations

Advantages and Disadvantages?

9
 Forms of Business Organizations:
Proprietorship

Owned by one person (proprietor)

Simple to set up
Owner has control over business
Limited life
Unlimited liability
Income tax paid by owner

10
Forms of Business Organizations:
Partnership

Similar to proprietorship except owned by more than

one person
Formalized in a written agreement
Limited life
Each partner has unlimited liability
Income tax paid by individual partners

11
Forms of Business Organizations:
Corporations
Separate legal entity owned by shareholders (owners
of shares)
Indefinite life; ease of raising capital
Shareholders enjoy limited liability
Corporation pays income tax
May be public or private:
Public if shares are publicly traded
Private if shares are not available to the general public

12
LO 3: Three Types of Business Activities
 All businesses are involved in all three
activities:
o Financing – funds to finance operations
o Investing – Long-term assets to operate the business
o Operating – Day to day activities
Financing Activities
• Obtaining (and repaying) funds to finance the operations of
the business
• Examples:
o Selling or repurchasing shares (equity financing)
o Borrowing money or repaying loans (debt financing)
• Forms of debt
o Bank indebtedness, bank loans, long-term debt such as
mortgages, bonds, finance leases
Investing Activities
• Purchase or sale of long-lived assets needed to operate the
company
• Examples
o Purchase or sale of long-lived assets such as property,
plant and equipment and intangible assets
o Purchase or sale of investments, such as shares or debt
securities of other companies
Operating Activities
• Operating activities are the main day-to-day activities of
the business
• Examples
o Sources of income (revenue and income)
o Expenses
o Related accounts such as accounts receivable and
accounts payable
Introduction to Business and Accounting
Annual Report and Financial Statements
Annual Reports :
Canadian Tire; Air Canada
GAAP: IFRS or ASPE
Accounting language

17
Annual Report
• Public corporations must produce an annual report
each year, which contains:
o Financial statements
o Management discussion and analysis
o Auditor’s report
o Notes to financial statements
• Annual Reports : Canadian Tire; Air Canada
o D2L: “Content by topic” section
 Generally Accepted Accounting
Principles / Practice (GAAP)
Rules and practices for the preparation of financial
statements
Different for publicly-traded and private corporations
Publicly-traded corporations use International
Financial Reporting Standards (IFRS)
Private corporations may use IFRS or Accounting
Standards for Private Enterprises (ASPE)
Proprietorships and partnerships generally follow
ASPE for external reporting - no legal requirement

19
LO 4: Financial Statements
NOTE: We will introduce the basics of the financial
statements now and return to them in detail later
after we learn about the accounting system
Income statement / Statement of Income
Statement of changes in Equity (IFRS) /Retained
Earnings (ASPE)
Statement of Financial Position (Balance Sheet)
Statement of Cash Flows (Ch13, near end of course)

20
Purpose of each Financial Statement
Income statement / Statement of Income
Reports revenues and expenses for a specific period of
time
Revenues less Expenses = Net Income (Profit)/ Loss
Statement of changes in equity
Reports the changes in each component of
shareholders’ equity during a period of time
Mainly = Share capital and Retained Earnings
Statement of Financial Position (Balance Sheet)
Shows the assets, liabilities and shareholders’ equity at
a specific point in time 21
Financial Statements
(continued)
Statement of cash flows
Shows, for a specific period of time, how company
obtained cash and how that cash was used
Operating, Investing, Financing
Order of preparation of statements:

22
 “Accounting Equation”
Assets
=
Liabilities
+
Shareholders’ Equity

This is the basis of the Statement of Financial

Position
We will return to this later
23
Use of financial statements
Financial Statement Analysis (see Ch 14)
Liquidity & Working Capital
Solvency
Profitability
Helps users to understand
financial performance and
financial position of a business
Tools: Ratios, Vertical & Horizontal Analysis

24
Use of financial statements
Specific tools can be used to analyze the financial
statements
Ratio analysis expresses the relationships between
selected financial statement data
Use comparisons to aid in analyses:
Intra-company comparisons cover two or more periods for the
same company
Inter-company comparisons between the company and a
competitor
Industry average comparison based on averages for particular
industries
Using the Financial Statements – Data
Analytics

• Process of analyzing enormous amounts of data to find

patterns, correlations, trends, insights
• Used to enhance decision making, including decisions
impacting financial reporting

Copyright ©2020 John Wiley & Sons, Inc. 26

Conceptual Framework of Accounting

CHAPTER 2

27
Learning Objectives
LO 1: Identify the sections of a classified statement of
financial position. (after Ch 4 completed)
LO 2: Identify and calculate ratios for analyzing a
company’s liquidity, solvency, and profitability.
(Ch 14 at end of course)
LO 3: Describe the framework for the preparation and
presentation of financial statements.

Copyright ©2020 John Wiley & Sons, Inc. 28

LO 3: Conceptual Framework of Accounting

Guides decisions about:

what to present in financial statements
alternative ways of reporting economic events
appropriate ways of communicating this information

29
Conceptual Framework for Financial
Reporting
Five main sections:
1. Objective of financial reporting
2. Qualitative characteristics of useful financial
information
3. Underlying assumptions
4. Elements of financial statements
5. Measurement of the elements of financial statements

30
Objective of Financial Reporting
To provide financial information that is useful to
existing and potential investors, lenders and other
creditors,
who are making decisions about providing resources
to a company. Including:
Buying, selling, holding equity and debt
Providing or settling loans or other credit
Financial information is provided by general purpose
financial statements.

31
 Qualitative Characteristics of Accounting
Information
Relevance:
Information has relevance if it makes a difference in users’
decisions
May have predictive value and/or confirmatory value
Materiality is important: will information influence the
decisions of users?
 Faithful representation:
Information should reflect economic reality
It must be complete, verifiable and free from material
error

32
 Enhancing Qualities of Useful Information
Comparability:
Users can identify and understand similarities and differences
among items
Verifiability:
Independent consensus that information is faithfully
represented
Timeliness:
Available before it loses its usefulness in decision-making
Understandability:
Classified, characterized, and presented clearly and concisely

33
Constraints, Assumptions, and
Measurement (1 of 2)
Cost constraint: the benefits of reporting the
particular information must be greater than the costs of
providing it.
Going-concern assumption: it is assumed that an
entity is a going concern and will continue to operate in
the foreseeable future. provides a foundation for
accounting
Reporting entity assumption: the entity may be a
separate single entity, a portion of an entity, or
comprises more than one entity. It is not necessarily a
legal entity.
34
Elements of Financial Statements
Assets
Liabilities
Equity
Revenues
Expenses

Basic of preparation of financial statements

We will do a lot of work on these in the next topic

35
Measurement of the Elements
Accountants have developed principles that describe
when and how the elements of financial statements
should be:
Recognized
Measured, and
Reported
Known as generally accepted accounting principles
(GAAP)

36
 Measurement of the Elements
Historical cost:
Assets and liabilities should be recorded at their cost when
acquired
Not only at time of purchase, but throughout the life of each
asset and liability
Fair value:
Certain assets and liabilities should be recorded and reported
at fair value
In choosing between these two, apply the concepts of
relevance and representational faithfulness

37
Qualitative Characteristics

Exercises (practice these yourselves):

Brief Exercise BE 2-10, p.2-36
Brief Exercise BE 2-11, p.2-36
Exercise E 2-9, p.2-40

38
Accounting and the Environment
• Users of statements have begun demanding more
information about a company’s environmental, social
and governance (ESG) factors
• Public companies are now preparing Sustainability
Reports
• Standards for preparation of this information are still
evolving

Copyright ©2020 John Wiley & Sons, Inc. 39

Copyright
Copyright © 2023 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Act without the express written permission of the
copyright owner is unlawful. Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up
copies for his/her own use only and not for distribution or resale. The Publisher assumes
no responsibility for errors, omissions, or damages, caused by the use of these programs or
from the use of the information contained herein.