Power of Accounting Accounting World

Accounting

is a system that

Identifies Records

BUSI5004 - Accounting I

Relevant

François Brouard, DBA, CA Sprott School of Business Carleton University

Reliable

information that is

Communicates

to help users make better decisions.

Comparable © 2007, François Brouard

THE THEACCOUNTING ACCOUNTING PROCESS PROCESS

Types of Accounting Information

Accounting links

ECONOMIC ECONOMIC ACTIVITIES ACTIVITIES

TTAAX X

AL NCCIIAL NAAN FFIIN

decision makers with economic activities – ACCOUNTING ACCOUNTING INFORMATION INFORMATION and with the results of their decisions DECISION DECISION MAKERS MAKERS © 2007, François Brouard

Financial Accounting Q Constraint – GAAP Q Users – external Q Historical Q Macro reporting Q General purpose Q Decisions – investing and lending © 2007, François Brouard

RIAALL NAGGEERI M MAANA © 2007, François Brouard

Provide Information Useful for Decision Making

Managerial Accounting Q No constraints Q Users – internal Q Future oriented Q Micro reporting Q Special purpose Q Decisions – operating, investing, financing, and evaluation.

Amount and Timing of Cash Flows

Economic Resources, Claims, Changes

© 2007, François Brouard

1

Canadian Accounting Profession

Judgment,

Chartered Accountant (CA)

Q

Certified Management Accountant (CMA)

and Ethical Behaviour

Selected Opportunities in Accounting

Q

Professional Competence,

Q

Opportunities in Practice

Financial

Managerial •General accounting •Cost accounting •Budgeting •Internal auditing •Consulting •Controller •Treasurer

•Preparation •Analysis •Auditing •Regulatory •Consulting •Planning •Criminal investigation

Certified General Accountant (CGA)

© 2007, François Brouard

Taxation •Preparation •Planning •Regulatory •Investigations •Consulting

Accountingrelated •Educators •Lenders •Consultants •Traders •Directors •Underwriters •Planners •Appraisers •Forensic investigation

© 2007, François Brouard

Guidelines for Ethical Decision Making n Identify Ethical Issues

p Make Ethical Decision

o Analyze Options

Business Context

BUSI5004 - Accounting I Use personal ethics to recognize ethical issues.

Consider both good and bad consequences for all affected.

François Brouard, DBA, CA Sprott School of Business Carleton University

Choose the best option after weighing all consequences.

© 2007, François Brouard

Aims of Organizations Q

Social role of organizations

Profit oriented organizations

Q

Non-profit oriented organizations (NPO)

Q

Public sector

For-profit organizations (FPO)

Profitability Social objectives

© 2007, François Brouard

Not-for-profit organizations (NPO)

Social objectives Profitability

© 2007, François Brouard

2

Types of Business Q Q

Service Merchandizing

Forms of Business Organizations No inventory Inventory

– Retailers – Wholesalers Q

Manufacturing

– Finished goods

Q Q Q Q

Inventory – Raw materials – Work-in-process – Finished Goods

© 2007, François Brouard

Q Q

Sole Proprietorship Corporation Partnership and Limited Partnership Joint Ventures Co-ownership Trust

© 2007, François Brouard

Sole Proprietorship

Corporation

Definition

Definition and Types

Q

Definition

Q

Definition

«an unincorporated business owned by one individual»

«a business organized as a separate legal entity, with ownership divided into transferable shares of capital stock» Q

Types – private corporation – public corporation

© 2007, François Brouard

© 2007, François Brouard

Corporation

Partnership

Illustration

Definition and Types Q

Individuals / Shareholders

Corporation (HOLDCO) Corporation (OPCO)

© 2007, François Brouard

Definition (IT-90, par. 2) «a partnership is the relation that subsists between persons carrying on business in common with a view to profit»

Individuals / Shareholders

Q

Types – Partnership – Limited partnership

Corporation (OPCO)

© 2007, François Brouard

3

Partnership

Limited Partnership

Illustration

Definition Q

Individual

Individual

Individual

Individual

Individual

Corporation

Corporation

Corporation

«the limited partnership is a formal entity created, as corporations, by legal statute ... the entity must have two separate classes of partners : general partners and limited partners» Q

Partnership

Partnership

Partnership

© 2007, François Brouard

Definition (Buckwold, 2004, p.540)

Special type of partnership used to flow out deductions and losses to passive investors Source : Buckwold (2004, p.540)

© 2007, François Brouard

Limited Partnership

Joint Venture and Co-ownership

Illustration

Overview Q

Individual

Corporation (General partner)

Individual

Individual

Corporation

Corporation

Definition (Woodlin Developments Ltd 86 DTC 116)

Individual

«a business undertaking by two or more parties in which profits, losses and control are shared … a more limited scope and duration» Q

(Limited partners)

Limited Partnership

© 2007, François Brouard

Indicators of a Joint Venture – joint property interest in the venture – right of mutual control and management – limitation to a single undertaking or limited Source : Woodlin Developments Ltd (TCC) 86 DTC 116

© 2007, François Brouard

Trust

Trust

Definition

Illustration

Q

Definition «a relationship whereby a person (who is called a trustee) is bound to deal with property over which he of she has control (which is called the trust property) for the benefit of persons (who are called the beneficiaries) any of whom may enforce the obligation»

Beneficiaries

Settlor

Assets

Trust

Trustee

Assets

© 2007, François Brouard

Source : Beam et al. (2003-2004, p.1051)

© 2007, François Brouard

4

Business Model for a commercial SME

Forms of Business Organizations

Enterprise

Comparison of characteristics Governments

Sole Proprietorship Characteristics Legal status Liability Accounting status Tax status

Corporation

$

Taxes Assistance

Services $

A/R

Services

Partnership

Employees

$

Trust

CLIENTS

Sales Investment

Not separate legal entity No personal liability Separate entity Income taxable to corporation

Not separate legal entity Personal liability Separate entity Income taxable to owner

Separate legal entity No personal liability Separate entity Income taxable to trust or beneficiaries

Separate legal entity Personal liability Separate entity Income taxable to partners

© 2007, François Brouard

Goods

$

Shareholders $ Services

$

$ Salaries Dividends

Inventories

Goods

Purchases $ Loans $

Interests

Bankers

Loans

A/P

Suppliers

$ Services

$ Interests © 2007, François Brouard

Basic Accounting: From Events to Decisions Annual Report Highlights Management’s Discussion and Analysis of Operations

Accounting Process Accounting

Economic Activities

BUSI5004 - Accounting I

GAAS

GAAP

Audit Report

Management’s Responsibility Report

Financial Statements

Cycle Managerial Information

François Brouard, DBA, CA Sprott School of Business Carleton University

Users & Decisions

Tax Information Events

Accounting Cycle and Standards

Accounting Information

© 2007, François Brouard

Accounting Cycle Recording transactions 1. Analyze transactions 2. Journalize transactions 3. Post to GL accounts

Adjusting entries 4. Prepare unadjusted TB 5. Adjust some accounts 6. Post to GL accounts 7. Prepare adjusted TB

Accounting Principles and GAAP

Economic Activities

GAAP

Reversing entries 12. Reverse some accounts 13. Post to GL accounts

Events

Preparing statements 8. Prepare Financial Statements

Closing entries 9. Close some accounts 10. Post to GL account 11. Prepare post-closing TB Accounting Process

Financial Statements

Users & Decisions

BUSI5004 - Accounting I François Brouard, DBA, CA Sprott School of Business Carleton University

© 2007, François Brouard

5

Accounting Conceptual Framework

GAAP Accounting Postulates Q Users

Objectives

Quality of accounting information Recognition

A

Measurement Presentation

Interpretations (judgment)

Principles

A

Q Q

Constraints

Postulates

G

Q

Information needs

Elements of financial statements

Accounting conventions

Standards

P

Financial Statements

Inspired by Ménard et al. (1991, p.44) and Lauzon (1990, p.137)

© 2007, François Brouard

GAAP

Q Q Q Q Q Q Q

Objectivity (reliability, no bias) Principle Cost Principle Realization (revenue recognition) Principle Matching Principle Consistency and Uniformity (comparability) Principle Disclosure Principle Materiality Principle Conservatism Principle

Source: Meigs, Lam, Mallouk (2002) and Belkaoui (2000, p.161-)

© 2007, François Brouard

Source: Meigs, Lam, Mallouk (2002) and Belkaoui (2000, p.161-)

© 2007, François Brouard

Basic Elements

Accounting Principles Q

Accounting (Business) Entity Postulate Going-concern Postulate Unit of measure (stable-dollar) Postulate Accounting-period Postulate

Assets

Liabilities

Current & Long term

Current & Long term

Shareholders’ Equity Net Assets Revenues

Expenses

Gains

Losses

© 2007, François Brouard

Users Issue Shareholders / Investors Members / Contributors

Creditors Objectives

Users

Preferred users in the CICA Handbook

Analysts ands advisors

Financial Statements Overview

Employees Directors Customers and suppliers Industry groups Labor unions Governmental departments Public Regulatory agencies Other companies Standard setters and researchers

© 2007, François Brouard

S O C I E T Y

BUSI5004 - Accounting I François Brouard, DBA, CA Sprott School of Business Carleton University

Adapted from Stamp (1981, p.50) and CICA Handbook (1000.09/.11)

6

Financial Statements Components

Financial Statements Components

For profit organization

For non-profit organization

Q

Balance Sheet Income Statement Statement of Retained Earnings Statement of Cash Flows Notes to the Financial Statements

Q

Additional information

Q Q Q Q

Q

Statement of Financial Position Statement of Operations Statement of Changes in Net Assets Statement of Cash Flows Notes to the Financial Statements

Q

Additional information

Q Q Q Q

© 2007, François Brouard

© 2007, François Brouard

Financial Statements (sole proprietorship) Balance Sheet As at December 31, 200X

x

x

Long-term investments

x

Long-term debt

x

Capital assets

x

OWNER’S EQUITY J. Barber, Capital

x

Intangible assets

x

Total assets

Total liab. & equity

XX

Balance Sheet

For the year ended December 31, 200X

LIABILITIES Current liabilities

ASSETS Current assets

Financial Statements (corporation - for profit)

Statement of Cash Flows

XX

OPERATING ACTIVITIES Net income/(loss) Items not affecting cash

x x

INVESTING ACTIVITIES

x

FINANCING ACTIVITIES

x

Net increase/decrease in cash XX Cash position, beginning of year x Cash position, end of year x

Income Statement

Statement of Owner’s Equity

For the year ended December 31, 200X

For the year ended December 31, 200X

REVENUES

x

EXPENSES

(x)

NET INCOME/(LOSS)

XX

J. Barber, Capital, beginning of year x + Investments by owner x + Net income x - Withdrawals by owner (x) - Net loss (x) J. Barber, Capital, end of year x

Statement of Cash Flows

As at December 31, 200X

Notes to Financial Statements

© 2007, François Brouard

For the year ended December 31, 200X

x

LIABILITIES Current liabilities

x

Long-term investments

x

Long-term debt

x

Capital assets

x

SHAREHOLDERS’ EQUITY Share capital x Retained earnings x

ASSETS Current assets

Intangible assets Total assets

x

Total liab. & equity

XX

XX

OPERATING ACTIVITIES Net income/(loss) Items not affecting cash

x x

INVESTING ACTIVITIES

x

FINANCING ACTIVITIES

x

Net increase/decrease in cash XX Cash position, beginning of year x Cash position, end of year x

Income Statement

Statement of Retained Earnings

For the year ended December 31, 200X

For the year ended December 31, 200X

REVENUES

x

EXPENSES

(x)

Retained earnings, beginning of year + Net income/loss - Dividends Retained earnings, end of year

NET INCOME/(LOSS)

XX

x x (x) x

Notes to Financial Statements

© 2007, François Brouard

Financial Statements (corporation - non-profit) Statement of Financial Position

Statement of Cash Flows

As at December 31, 200X

For the year ended December 31, 200X

x

LIABILITIES Current liabilities

x

Long-term investments

x

Long-term debt

x

Capital assets

x

Intangible assets

x

NET ASSETS Share capital Retained earnings

x x

ASSETS Current assets

Total assets

XX

Total liab. & net assets

Statement of Operations

XX

OPERATING ACTIVITIES Net income/(loss) Items not affecting cash

x x

INVESTING ACTIVITIES

x

FINANCING ACTIVITIES

x

Net increase/decrease in cash XX Cash position, beginning of year x Cash position, end of year x

Statement of Changes in Net Assets

For the year ended December 31, 200X

For the year ended December 31, 200X

REVENUES EXPENSES EXCESS (DEFICIENCY) OF REVENUES OVER EXPENSES

Balance, beginning of year x + Excess of revenues over expenses x + Endowment contributions x +/- Restrictions (x) Balance, end of year x

© 2007, François Brouard

x (x)

XX

Q Q

Q Q

Notes to Financial Statements

Q

Internal Control Structure Generally accepted accounting principles (GAAP) Audits of financial statements Accounting Standards Board of the Canadian Institute of Chartered Accountants Securities commissions

© 2007, François Brouard

7

Financial Statement Format for Non-profit

Accountants’ Reports

Financial Statement Format

Credibility

Q

Q

Q

Auditor Report Review Engagement Report Notice to Reader

© 2007, François Brouard

Non-profit - Fund Balances Q Q Q Q

Invested in Capital Assets Externally Restricted Internally Restricted Unrestricted

Separate Funds Not Reported

Deferral Method of Recognizing Contributions

Restricted Fund Method of Recognizing Contributions

© 2007, François Brouard

Deferral Method of Recognizing Contributions

Source : CICA Handbook (4400.AI)

Non-profit - Type of Funds Q Q Q Q Q

© 2007, François Brouard

Separate Funds Reported

Operating Fund Endowment Fund Acquisitions Fund Research Fund Capital Asset Fund

© 2007, François Brouard

8