Chapter 1 - Business Decisions and Financial
Accounting
What You Really Need to Know
First of all, start at the beginning. (Isn’t accounting logical?) Each chapter starts with a
page about the “USER” information (Understand. Study. Evaluate. Review.). This
page identifies the Learning Objectives for the chapter. Translation: this is what the
authors are trying to help you understand! It really is a good place to start. Why don’t
you go to the textbook and review it right now?
You’re back again! Great! Let’s keep going…
In Canada there are three main organizational forms. You should understand the three
forms and be prepared to discuss how they are similar and how they differ from each
other. The three forms to remember are; Sole Proprietorship, Partnership, and
Corporations. Remember that corporations can be public companies or private
companies.
The purpose, set-up, and content of each of the four financial statements are definitely
the focus of this chapter. Here are some comments to get you started:

A Balance Sheet is a document which tells you what your company owns
(ASSETS), how much it owes (LIABILITIES), and what the owner(s) have
invested in the company (EQUITY) at one point in time. It is very important to
remember that ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY

An Income Statement is a document which tells you how much money your
company has made (or lost) over a period of time. It has three main components,
Revenues, Expenses, and net Income. The formula for determining Net Income is
REVENUE – EXPENSES = NET INCOME

A Statement of Retained Earnings is a document which shows how much of the
past profits have been left (or RETAINED) in the company to keep it running, as
opposed to being given out to the owner(s). This statement covers a specific
period of time and the formula to remember here is BEGINNING RETAINED
EARNINGS + NET INCOME (or – net loss) – DIVIDENDS = ENDING
RETAINED EARNINGS.

A Statement of Cash Flows is a document which explains why/how the bank
balance changed over the period of time covered by the statement. Changes can
come from making or losing money (OPERATIONS), buying or selling
Phillips et al. Fundamentals of Financial Accounting, 3Ce
Copyright McGraw-Hill Ryerson, 2012
What You Really Need to Know
Page 1-1
equipment/buildings (INVESTING), or from borrowing, lending or dealings with
the owner(s) (FINANCING).
Does that make sense so far? It’s a start. To make these new documents more familiar
and add a little more detail, take a moment right now to review the four statements and
their format. Right now? Yes. There’s no time like the present. Come back here when
you are done!
Back again? Great!
(If you didn’t leave, then do you promise to review the statements soon?)
The textbook covers the four financial statements in much more detail and mentions
which accounts are used in each statement. (Stop! Is that another new concept? It was
in the tutorial. Think of it this way, accounts are like file folders. They are used to
organize similar information.) You do need to know all of the proper terminology
eventually! Make yourself a note about the five types of accounts and what they
organize. The five types of accounts are; ASSETS, LIABILITIES, REVENUE,
EXPENSES, and EQUITY.
At the end of each chapter you will find a box titled “Spotlight on IFRS”. IFRS stands for
International Financial Reporting Standards which are the required standards for Public
Corporations to use when reporting their financial information. These boxes summarize
the differences between GAAP (Generally Accepted Accounting Principles) and IFRS.
You should always take a peak at these differences.
Ok. That’s enough for now. For more hints about what is important, make sure that you
read all of the “You Should Know” and “Coach’s Tops” information in the margins of
your textbook.
One last comment. I promise. When you get tired of reading, take a break and review
the information found under the tab called “Understanding the Exhibits”. Exhibit 1.6 is
really useful. It is an animated look at how the financial statements fit together and relate
to one another. It’s a really good review.
One more comment… Just kidding. That’s it for now!
Phillips et al. Fundamentals of Financial Accounting, 3Ce
Copyright McGraw-Hill Ryerson, 2012
What You Really Need to Know
Page 1-2