Test Bank For Accounting Principles 6th Canadian Edition 6e Weygandt Kieso Kimmel Trenholm Kinnear Barlow

Test Bank For Accounting Principles 6th Canadian Edition 6e Weygandt Kieso Kimmel Trenholm Kinnear Barlow -Identify the use and users of accounting and the objective of financial reporting. Accounting is the information system that identifies, records, and communicates the economic events of an organization to a wide variety of interested users. Good accounting is important to people both inside and outside the organization. Internal users, such as management, use accounting information to plan, control, and evaluate business operations. External users include investors and creditors, among others. Accounting data are used by investors (owners or potential owners) to decide whether to buy, hold, or sell their financial interests. Creditors (suppliers and bankers) evaluate the risks of granting credit or lending money based on the accounting information. The objective of financial reporting is to provide useful information to the investors and creditors who make these decisions. Users need information about the business’s ability to earn a profit and generatecash. For our economic system to function smoothly, reliable and ethical accounting and financial reporting are critical. Compare different forms of business organizations and explain how Canadian accounting standards apply to these organizations. The most common examples of business organizations are proprietorships, partnerships, and corporations. Generally accepted accounting principles are a common set of guidelines that are used to prepare and report accounting information. In Canada, there are two sets of standards for profitoriented businesses. Publicly accountable enterprises follow International Financial Reporting Standards (IFRS) and private enterprises have the choice of following IFRS or Accounting Standards for Private Enterprises (ASPE). The economic entity concept requires the business activities of each economic entity to be kept separate from the activities of its owner and other economic entities. The going concern assumption presumes that a business will continue operations for enough time to use its assets for their intended purpose and to fulfill its commitments. Describe the components of the financial statements and explain the accounting equation. Assets, liabilities, and owner’s equity are reported in the balance sheet. Assets are resources owned or controlled by a business that are expected to provide future services or benefits. Liabilities are current obligations arising from past events to make future payments of assets or services. Owner’s equity is the owner’s claim on the company’s assets and is equal to total assets minus total liabilities. The balance sheet is based on the accounting equation: Assets = Liabilities + Owner’s Equity. The income statement reports the profit or loss for a specified period of time. Profit is equal to revenues minus expenses. Revenues are the increase in assets, or decrease in liabilities, that result from business activities that are done to earn profit. Expenses are the cost of assets consumed or services used in a company’s ordinary business activities. They are decreases in assets or increases in liabilities, excluding withdrawals made by the owners, and result in a decrease to owner’s equity. The statement of owner’s equity summarizes the changes in owner’s equity during the period. Owner’s equity is increased by investments by the owner and profits. It is decreased by drawings and losses. Investments are contributions of cash or other assets by owners. Drawings are withdrawals of cash or other assets from the business for the owner’s personal use. Owner’s equity in a partnership is referred to as partners’ equity and in a corporation as shareholders’ equity. 1 - 4 Exercises for Accounting Principles, Sixth Canadian Edition A cash flow statement summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time. Determine what events are recognized in the financial statements and how the events are measured. Only events that cause changes in assets, liabilities, or owner’s equity are recorded. Recognition is the process of recording items and measurement is the process of determining the amount that should be recognized. The cost principle states thatassets should be recorded at their historical (original) cost. Fair value may be a more appropriate measure for certain types of assets. Generally fair value is the amount the asset could be sold for in the market. The monetary unit assumption requires that only transaction data that can be expressed as an amount of money be included in the accounting records, and it assumes that the monetary unit is stable. Analyze the effects of business transactions on the accounting equation. Each business transaction must have a dual effect on the accounting equation. For example, if anindividual asset is increased, there must be a corresponding (1) decrease in another asset, (2) increase in a liability, and/or (3) increase in owner’s equity. Prepare financial statements. The income statement is prepared first. Expenses are deducted from revenues to calculate the profit or loss for a specific period of time. Then thestatement of owner’s equity is prepared using the profit or loss reported in the income statement. The profit is added to (losses are deducted from) the owner’s equity at the beginning of the period. Drawings are then deducted to calculate owner’s equity at the end of the period. A balance sheet reports the assets, liabilities, and owner’s equity of a business as at the end of the accounting period. The owner’s equity at the end of period, ascalculated in the statement of owner’s equity, is reported in the balance sheet in the owner’s equity section