Chapter 1 - Accounting environment.docx

Chapter 1 - Accounting environment.docx - Chapter 1 The...

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Chapter 1 – The Accounting Environment Week 1 – September 14, 2015 Accounting System for gathering, processing and organizing information about an entity (an economic unit of some kind) and reporting and distributing that information to various users who need the information to make decisions Series of steps: 1. Identify the economic event or transaction 2. Record, classify and summarize the information in financial records (bookkeeping) 3. Communicate the information by producing accounting reports 4. Users then interpret and analyze the information to make decisions Preparers (ie. management) of accounting information have many choices available to them as to how to structure and report this information Users of financial information need to determine whether the information provided is useful or relevant for their specific needs Conflicts will arise between the objectives of preparers and users. This creates need for that information to be audited, particularly in cases of public companies In order to make good decisions, the choices/biases that went into the preparation of the accounting information must be identified The Accounting Environment Framework generally consists of 4 key elements which will impact how the company will account for its economic activity o Type of entity (corporation, sole proprietor, partnership, NPO, government, individual) o Contraints (ASPE, IFRS, covenants with banks, the Income Tax Act, securities law, moral and ethical obligations o Stakeholders & their objectives o Overall characteristics of entity and possible environmental factors (type of clientele, industry, size, political issues) Type of Entity Corporations Separate legal entity Issues shares and thus have shareholders who own the corporation Limited liability and ease of transfer of ownership 1
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Expensive cost of setting up and running Corporations can be either o public (traded on a stock exchange and financial info must be audited and made available to the public) or o private (close group of investors whose shares do not trade publicly and have no
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