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Case Study • It was late August and Amanda Del Toro was about to attend her first MSS High School student council meeting as treasurer. She was elected back in June with the encouragement of last year’s treasurer and Michelle’s good friend, Michelle Balbard. Michelle was now attending far off Queen’s University. Amanda’s first duty was to recommend to the student council executive the amount to charge students for the student activity fee.
On the floor of the Student Council room was a box that Michelle left behind containing the entire financial information from the previous year. Amanda opened the box. She gasped in disbelief. The box was stuffed with dishevelled papers; bills, receipts, cheques, bank statements, cash and a few rolls of coin. How was she supposed to make sense of this mess? How could she make an informed decision without knowing any information about last year’s student council? How could Michelle have been so disorganized? For Michelle to leave behind such a jumble was unforgivable. Amanda became very angry. “Where to start?” she thought. “I only have an hour before the meeting!”
Amanda started to pull out papers; a receipt for food for the semi-formal, a five dollar bill, a $50.00 cheque that had not been deposited, the July bank statement. Amanda paused and looked at the balance on the bank statement; negative $758.00! • What action should Amanda take to ensure that she makes an informed decision regarding the student activity fee?
Answer • Amanda does indeed have a big job in front of her. First, she needs to CLASSIFY all the information into categories (dances, spirit days, special events etc.). She then needs to RECORD the money spent and the money received (activity fees, fundraising, dances etc.). She then needs to SUMMARIZE this information to find out how much money the student council requires to operate for the upcoming year.Finally, she must ANALYSE the information in order to make an informed DECISION as to what the students’ activity fee will be. The tasks Amanda needs to complete areexactly the same as the tasks for an accountant.
What is Accounting? • Accounting is the classifying, recording, summarizing, and analysing of financial information.
Bookkeeping vs. Accounting • So what is bookkeeping? Bookkeeping involves the recording part of accounting. Usually accountants do not do the recording of information. Accountants are primarily responsible for summarizing and analysing the information.
Purpose of Accounting • The purpose of accounting is to provide information for decision-making; should a business hire more people? Should a new machine be purchased? Should a factory be moved?
Who Uses Accounting Information? And For What? • Managers and Business Owners • Planning and controlling daily operations as well as long-term goals • Investors (current and potential) Should I continue, discontinue, increase, and/or decrease my investment • Creditors (i.e. Banks) Should I give the loan? Will I get my money back?
Government Regulatory Bodies ie. Canadian Revenue Agency (Is this person or business paying all their taxes) • Employees - Job security, career advancement, flexibility, potential investors • Unions - For contract negotiations as well as other interests of the employees (raise, better benefits?)
Types of Business • Business - An organization that involves the manufacture and/or sale of goods and/or services in order to earn a profit. • Most business fall into one of the four categories: 1. The Merchandising Business 2. The Service Business 3. The Manufacturing or Producing Business 4. The Non-Profit Organization
The Manufacturing Business • Buys raw materials, converts them into a product and sells these products to earn a profit. • Consider a construction company, a paper mill, or steel plant.
The Producing Business • Closely related to manufacturing • Examples include farms who may produce milk, grain, etc. Other examples include oil extraction, mining, forestry, hunting, and fishing
Non-Profit or Not-for-Profit Organization • An organization that does not seekto make a profit, but insteadraises money/funds for a specific goal. (churches, charities, recreational sports clubs) • Examples include: Canadian Cancer Foundation, Amnesty International, Junior Achievement etc
Forms of Business Ownership • 1. Sole Proprietorship • owned by one person • 2. Partnership • Usually owned by two or more partners • 3. Franchise • One business licenses (allows) another to use its name, operating procedure, etc. • Can have any form of ownership • 4.Cooperative • Owned by its workers or by members who buy from the business • 5. Corporation • Business is an artificial “person” created by law and owned by shareholders 16
Sole Proprietorship(over 1 million in Canada) • Advantages – So what? • Keep all the profits • Make all the decisions • You are your own boss • (i.e Financial information can be kept secret. from competitors), but not the government • Disadvantages • Unlimited Liability • Facing personal and financial risks and challenges on your own • Borrowing money may be more difficult • Huge time commitment 17
Sole Proprietors • Examples may include individuals who are: • Artists • Authors • Carpenters • Computer specialists • Digital designers • Ecotourism guides • Farmers • Industrial designers • Photographers • Web designers • Chefs or Bakers • Hair stylists 18
Partnership • More complex and needs a written agreement • Partners must discuss and agree on issues such as: • how much time and money each partner will put into the business • How the profits will be shared • Who will make decisions about different aspects of the business • Who will manage the employees • How the partnership might be ended 19
Partnership Agreement • All partners must sign the partnership agreement which includes: • the name and location of the business • Its purpose • The amount of partner’s investment • The way that the profits and losses are to be divided • The duties and responsibilities of each partner • The procedures for ending the partnership 20
Partnerships • Disadvantages • Unlimited liability • Your personal assets (home, care etc may need to be used to pay off business debts) • Conflicts between partners that can not be worked out • Advantages • Inexpensive to set up and organize ($1000) • Two people to invest and it is easier to borrow from a bank • More brains filled with different knowledge, experience, skills • Shared responsibility eases stress and workload • Share debt and can more easily take a vacation 21
Typical Partnerships • Small independent service or retail businesses. • bakeries, hair salons, flower shop, convenience store, landscaping or décor store, consignment shop, restaurants, retail stores,plumbers, electricians, mechanics, carpenters • Professional Designations or Apprenticeships • accountants, lawyers, doctors, veterinarians, mechanics, plumbers, electricians, carpenters 22
Franchise • One of the fastest growing forms of business ownership • The franchisor sells to another person (the franchisee) the rights to use the business name and to sell a product or service in a given territory. • Available in many different sectors (fast food, wine, funeral homes) • Franchise can be any form of business ownership 23
Franchise Agreement • Written contract between the franchise seller and buyer • Permit the franchisee to use the franchisor’s name, products, packaging • Franchisor will specify how the franchise is to be operated, what products can be sold, the advertising, etc. • Provide more than 1 million jobs directly, many more indirectly • Annual sales of $100 billion 24
Franchises • Advantages • Proven track record and nationally or internationally recognized name • Personal ownership like a sole proprietorship • Less stress in initial set up as most issues like process, products and location, equipment, décor are spelled out by the franchisor • Disadvantages • Expensive to buy • Must pay royalties for your sales • Little say in many of the business decisions • If the franchisor fails, so does the franchisee 25
Co-operatives • Also called Co-ops • Business owned and operated by a group of people with a strong common interest • Start-up costs are shared among members • Members own and control and make all the business decisions 26
Examples of Coops • Farmers • Belong to producer co-ops • Members bring crops to a central location to sell them • Coop monitors the supply of the crop and controls its sale and price • Farmers do not compete against each other or undercut other’s prices • Farmers can combine to buy equipment and reduce costs and share expertise • Example: Saskatchewan Wheat Pool sells products all over the world. 27
Consumer Co-ops • Join together to operate a business that provides them with goods and services • Profits are divided among the members in proportion to the amount of business that each member does • Examples: Omish Community Furniture Co-ops 28
Credit Unions/ Caisses Populaires • Financial co-ops • Like banks but profits are distributed annually to their members 29
Co-operatives • Disadvantages • Individual members hesitant to invest more – only one vote • Decision-making can be difficult because of multiple members • Commitment of members may vary because some have more money at stake and some may take things more seriously than others • Advantages • Shared skills and experiences • Less risk than for sole proprietor and partnership • Liability is limited to the amount of your share in the capital of the coop • Each member gets one vote – equal decision making and influence • If you have more shares, you still get one vote, but more share of the profits • Coops get discounts due to volume purchasing by many people • Control sale and price of goods 30
Corporation • Legal entity that exists independently of its owners who are the shareholders. • Has the same rights and obligations under Canadian law as a natural person • It can be found guilty of committing a crime 31
Corporation • Brought into existence by drawing up and filing with the proper government agency a document called the articles of incorporation • A lawyer and accountant are often needed to prepare this document 32
Corporation • Articles of Incorporation include information such as: • Name of corporation • Headquarters of corporation • Type of corporation • Number of shares allowed to be issued to the public for purchase 33
Classification of Corporations • 1. Non-Profit Corporation • 2. Crown Corporation • 3. Private Corporation • 4. Public Corporation 34
Non-Profit Corporations • Purpose is to undertake fundraising, to do research and to lobby for a particular cause in order to help people • Example: United Way, Museums, Religious organizations, athletic and artistic organizations. 35
Crown Corporation • Owned by the federal, provincial, or municipal governments • Function is to provide a special service to the public • Examples: Bank of Canada, Royal Canadian Mint, Canada Post, Canadian Broadcasting Corp. (CBC) 36
Private Corporation • Can have up to 50 shareholders • A single person who incorporates may have only one shareholder – him or herself. • Usually small but not always • Eatons now owned by Sears was a private corporation 37
Public Corporation • Does not have a restriction on the number of shareholders. (unlimited number) • Shares are bought and sold (traded) on the stock exchanges, such as the Toronto Stock Exchange, the Vancouver Stock Exchange. • Examples include: Tim Hortons, Google, 38
Owners/Shareholders (Elect Board of Directors) Board of Directors (hire officers) STRUCTURE OF A CORPORATION Officers i.e. CEO (Chief Executive Officer) (set corporate objectives and hire managers) Managers (Supervise Employees) Employees 39
Structure of a Corporation • The shareholders elect a board of directors, who direct the overall affairs of the corporation • The BOD hire the officers (i.e. the President of the corporation) who decide on the objectives for the company and hire the managers and essentially run the day to day operations of the business. • The managers supervise the employees. 40
Corporation • Disadvantages • More complicated to set up due to government regulations • Must be registered in every province it operates • Time consuming process and expensive • Closing a corporation can be time consuming and expensive • Business is managed by employees who may or may not be shareholders. • Must publish an annual report outlining the companies financial position which can benefit competitors • Changes in stock market could impact future financial resources raised through issuing new stock to sell to the public • Advantages • Owners are only liable for the amount they invest – Limited liability • Has more financial resources to expand and grow (money collected from the selling of shares) • Easier to get a loan from a bank because it has more assets to use as security (collateral”) • The tax rate is lower than for a sole proprietorship. • (40-50% versus 23%) • Ownership is easily transferable 41
