Chapter 1

Accounting is a system for gathering data about an entitys economic activity, processing
and organizing that data to produce useful information about the entity, and communicating
(classifying/summarizing) that information to people who want to use it to make decisions.

Data is raw unprocessed facts; information is processed data that is useful.

Gather Data Process and Organize Data into information Communicate
Information
Accounting isnt a science. Its more of an art.
Accounting isnt precise or exact. There are multiple ways that you can choose to
measure most things.
Accounting doesnt provide the right answer.
Accounting is flexible.
Accounting requires judgement.
Bookkeeping is not the same as accounting.
Accounting has economic consequences.
The Cost-Benefit trade-off refers to the concept of comparing the benefits with the
costs and following through only if the benefits outweigh the costs.
Collecting too much information is referred to as an information overload and can
impair a persons ability to make decisions

The Accounting Environment refers to the circumstances an entity operates in. The
accounting environment is very complex so it involves critical thinking, hence the title of the
textbook A Critical Approach.

Overall environment
Political
Cultural
Economic
Competitive
Regulatory
Legal

Entities
Corporation Public: Sells shares to anyone on public stock market Private: Sells
shares only if shareholder agrees
Proprietorships
Partnership
Non-for-Profit Organizations
Government
Individuals

Stakeholders
Owners/Shareholders Their stake: Their investment of time/money into the entity
Employees Their stake: Wages
Unions/Regulators Their stake: Their own Jobs as well as appropriate conditions for
workers
Creditors & Tax Authorities Their stake: The money owed to them.
Customers Satisfaction and the actual product
Competitors Keeping competitive and on top of the market

Constraints
Contracts
Moral and Ethical consideration
Law
Income Tax Act
Demands of powerful shareholders
Accounting Standards IFRS: Single set of globally accepted accounting standards.
ASPE: Developed for Canadian private companies.

*Publicly accountable companies MUST USE IFRS.

*Private companies can choose to use, ASPE, IFRS or neither.
However, even with these constraints, the personal interests of managers can influence
them to prepare their financial statements to show better numbers.
Managerial Accounting refers to providing information to stakeholders who are internal to
an entity.
Financial Accounting refers to providing information to stakeholders who are external to
an entity.

Generally Accepted Accounting Principles (GAAP) is a framework

of accounting standards, rules and procedures defined by the professional
accounting industry, which has been adopted by nearly all publicly traded
U.S. companies.

Chapter 2

Components of the financial statement package

Balance Sheet (Also called statement of financial position) Like a photograph &
must balance.
Statement of comprehensive income (Includes the income statement) (Period of
time ex. 1 year) Like a movie compared to a photograph.
Statement of changes in equity
Statement of Cash Flows (Cash in/Cash out)
Notes

*The IFRSs conceptual framework is very narrow focused. Its objective is to provide useful
info about an entity to an existing or potential equity investor, lender, or any other form of
creditor.
Two levels of qualitative characteristics

The fundamental qualitative characteristics (Required for info to be classified as

useful)
Relevance
Faithful representation Complete, Neutral & Free from Error.

The enhancing qualitative characteristics (Not required but tend to enhance

the infos usefulness)
Comparability (What can we compare it to? Competitors/Previous years etc..)

Verifiability (Can it be verified by others results as well?)

Timeliness (Is it available in time to influence decisions?)
Understandability (Can it be easily understood by stakeholders?)

Basic Accounting Assumptions

Unit of Measure Report in a single unit of measure (usually money $$$)
Entity Concept Transactions that do not pertain to the entity of interest should be
excluded
Going Concern A going concern is an entity that will be continuing its operations
for the foreseeable future
Periodic Reporting Report on a periodic basic, not just at the end of the
companies lifespan.

Accounting Equation
A = L + OE
Assets
-Must Provide Future Benefit
-Must be controlled by the entity
-result of a previous transaction
-Be Measurable

Liabilities
-Present obligation/sacrifice
-Result of past transaction
-Be measurable

Owners Equity
The amount of the assets that are already financed by the owner (Assets that
arent liabilities) OE = A -L

Liquidity refers to the availability of cash or the ability to convert assets to cash
quickly.
Equations
Working Capital = Current Assets Current Liabilities
Current Ratio = Current Assets/Current Liabilities
*A current ratio of 2.47 means that for every dollar of current liabilities, the entity
has $2.47 of current assets, which suggest the company should be able to meet its
obligations.

Debt-to-Equity Ratio = Total Liabilities/Equity

^Risk indicator
*It is important to compare all ratios in order to get the most accurate analysis, not
just one.

Cashed Accounting measures cash in/out

Accrual Accounting measures economic activity rather than cash flows

Gross Margin = Revenue Cost of Sales

Gross Margin Percentage = Gross Margin / Revenue * 100
Comprehensive Income = Net Income + Other Comprehensive Income
Retained earnings at the end of the year = Retained earnings at the beginning
of the year + Net Income for the Year Dividends declared during the year

Chapter 3
Accounts receivable is the amount expected to be collected. Key word, expected.

The accounting cycle is the process of recording

data about transactions and economic events in an
accounting system and converting that data into
useful information like financial statements.
Assets = Liabilities + Owners Equity

Double-Entry Bookkeeping is a system in which

each transaction or economic event is recorded in
at least two places in the accounts.
Accounting Equation Spreadsheets
To do the above type of analysis you must answer
the following 3 questions

1)
Which element of the equation does the
transaction/occurrence effect? Assets,
Liabilities, Owners equity, revenue, expenses.
2)
Increase or Decrease?
3)
By how much?
Examples of Accounting Equation Spreadsheet
1) Cheticamp sells shares to investors for $50,000 cash.

Explanation: Cheticamp received $50,000 from the investors so cash, an asset, increases. By
purchasing shares, the investors have made an equity investment in Cheticamp, so owners' equity
increases.
2) Cheticamp purchases inventory and promises to pay the supplier $3,000 in 30 days.

Explanation: Cheticamp has received some inventory, which is an asset because it can be sold to
earn revenue. It didn't pay cash, but promised to pay in 30 days, so there is a liability to pay the
supplier.
3) Cheticamp provides services to a customer worth $1,100. The customer agrees to pay in 60 days.

Explanation: Services are provided to a customer, which represents an increase in revenue and an
increase in owners' equity. The customer has agreed to pay in 60 days, which is an asset because it
represents the right to receive the customer's money. Remember that revenue is reported on the
income statement but it's part of owners' equity. When revenue increases, owners' equity increases
at the same time.
4) Cheticamp collects $500 owed by a customer.

Explanation: This transaction converts one asset into another. The entity received cash from a
customer so assets increase. But assets also decrease because the customer has fulfilled its
obligation to pay Cheticamp, which decreases accounts receivable.
5) Cheticamp pays $2,000 owed to a supplier.

Explanation: Cheticamp has fulfilled its obligation to a supplier by paying an amount owing so
accounts payable decrease. The obligation is paid in cash so cash decreases.
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6) Cheticamp receives $2,500 from a customer for goods that will be delivered next month.

A journal entry describes how a transaction or economic event affects the accounting equation. A
spreadsheet isn't very practical for an entity with large numbers of transactions in a year and hundreds or
thousands of different asset, liability, and equity accounts. A journal entry accomplishes exactly the same
thing as an entry to an accounting equation spreadsheet, but in a different format. The journal entry
format showing the three key pieces of information appears below:

Page 110

Account names in a journal entry correspond to the column headings on the spreadsheet. The
terms debit and credit indicate whether the balance in the account has increased or decreased. These
terms have very precise meanings in accounting and are defined as follows:

Asset
Liability
Owners Equity
Expenses
Revenue

Debit
+
+
-

Credit
+
+
+

Examples
1.
2.
3.
4.
5.
6.

Sells shares to investors for $50,000 cash.

Purchases inventory and promises to pay the supplier $3,000 in 30 days.
Provides services to a customer worth $1,100. The customer agrees to pay in 60 days.
Collects $500 owed by a customer.
Pays $2,000 owed to a supplier.
Receives $2,500 from a customer for goods that will be delivered next month.

An entry that is not triggered by a transaction is

referred to as an adjusting entry.

Before we discuss adjusting entries in detail, note the following:

1.
Adjusting entries are required because revenues and expenses can be recognized at times other
than when cash is exchanged.
2.
Every adjusting entry involves a balance sheet account and an income statement account.
3.
Every adjusting entry is associated with a transactional entry that is recorded before or after the
adjusting entry. A transactional entry is a journal entry triggered by an exchange with another
entity.
4.
Adjusting entries are required only when financial statements are prepared.
5.
Adjusting entries never involve cash. If cash is part of the entry, it isn't an adjusting entry.

There are four types of adjusting entries. They are summarized in Table 3.5.

1)
Create Initial Journal Entry using
debit/credit method

2)
Transfer entries into t-accounts then make
adjusting entries

3)

Trial Balance

4)

Close temporary accounts

5)
Post-Closing entry to t-accounts and postclosing trial balance.

Chapter 4

Revenue can be recognized using The Critical-Event Approach, or the Gradual Approach.
The critical event approach recognizes all of the revenue at once as long the following 5
criteria are satisfied.
1.
2.
3.
4.
5.

Significant Risks Rewards have been transferred.

Seller no longer has control or involvement
Collection of payment is probable
Revenue is measurable
Expenses are measurable
Of the above, criteria 1 & 2 are referred to as the performance criteria.

Possible Critical Events

-Upon Delivery
-Upon Completion of Production
-After Delivery (in case of a warranty or return)
The gradual approach recognizes revenue bit by bit over the entire earnings
process rather than when a particular critical event occurs.
The gradual approach splits into 2 different types of gradual approaches
1) Percent of Completion (Self explanatory)
2) Cost Recovery/Zero Profit (With this method, revenue in a period is
recognized up to the amount of costs incurred during the period (except for the
last year of the project). In the final year of the contract, the remaining revenue
and expenses and all the profit are reported. In other words, no profit is reported
until the final year of the contract (because revenue always equals expenses in
the other years).
Regardless of how an entity recognizes revenue, its underlying economic
activity is still the same. Watch out for economic consequences, though
(such as altered amount of taxes payable).
MULTIPLE DEVLIVERABLE ARRANGEMENTS refer to the practice of recognizing
revenue at different times for each item in a collective package (ex.
Computer/Installation/Software package)
Expenses are always recognized when revenue is recognized. This is referred to as
matching.

Gains/Losses

A gain is any money you gained from selling for a greater price than you initially paid
A loss is any money you lost from selling for a lower price than you initially paid.
When there is a gain on land
1) Debit cash for the sale amount
2) Credit Land for the initial purchase value
3) Credit gain on land for amount of gain
When there is a loss on land
1) Debit cash for the sale amount
2) Debit loss on land for amount of loss
3) Credit Land for the initial purchase value
Objectives of Financial Accounting
User oriented objectives

Tax Minimization (Try to pay as little tax as possible)

Stewardship (responsibility for someone else's resources)
Management evaluation (The information should allow stakeholders to separate the
effects of management's decisions from the effects of luck and other factors beyond
management's control.)

Performance evaluation (Stakeholders of a charity might want to evaluate whether the

organization is spending an appropriate proportion of the money it raises on the cause, rather

than on fundraising and administration.)

Cash Flow Prediction (The information should allow stakeholders to separate the effects
of management's decisions from the effects of luck and other factors beyond management's
control.)

Monitor Contract Compliance (This information should allow stakeholders

to determine whether or not an entity is complying with the conditions of
their contract.)

Preparer oriented objectives

Tax Minimization
Bonus Plan Management
Income Maximization (Recognize revenue ASAP, and recognize all
expenses as late as possible)
Income Smoothing
Income Minimization

 Minimum Compliance

Constraints
There are, in fact, forces that limit managers' accounting choices:

accounting standards (IFRS, ASPE)

laws (tax, securities, corporations laws)

independent accountants and auditors who act on behalf of stakeholders to assess the accounting
choices made by the managers

contract terms

the information demands of powerful stakeholders who may dictate accounting treatments and
disclosures

facts surrounding the economic event or transaction being accounted for

Retained earnings are an indirect investment.