ACCY111 Lecture Notes - Lecture 2: Financial Statement, Cash Flow, Legal Personality

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9 May 2018

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Chapter 2 (Wk2) - Financial statements for decision making

1. Identify the common types of business entities

2. Discuss the functions carried out by managers

3. Outline the basic financial statements used in business to report to users for decision making

purposes

4. Explain the main assumptions made and the characteristics of information to be used in the

preparation of financial statements

5. Analyse the effects of business transactions on the accounting equation and on financial

statements

Types of business entities:

The business is always separated from the owner in accounting

Single proprietary or sole trader:

• Owned by one person

• Simple to set up

• Common form of business structure

• Separate accounting entity, not separate legal entity

• Unlimited liability

Partnership:

• Owned by two or more partners

• Simple to set up

• Separate accounting entity, not separate legal entity

• Unlimited liability

Company or corporation:

• Owned by shareholders

• Separate accounting entity

• Separate legal entity

• Limited liability (protection for owners)

Management functions: around decision making

Planning - what to do, how to do it --> Organising - developing the organisational structure -->

Directing - performing according to plan --> Controlling - evaluating actual versus planned

performance.

Three primary information types:

Financial performance

• The ability of the entity to utilise its assets effectively and efficiently.

• What are the business goals?

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Chapter 2 (Wk2) - Financial statements for decision making

Financial position

• The financial resources controlled by the entity

• Financial structure

• Measure of liquidity and solvency

Cash movements

• Ability to generate cash flow, focusing on three areas/generated through

- Operating activities (provision of and payment for g/s), Investing activities (acquisition and disposal

of long term assets), Financing activities (raising of funds).

Basic financial statements:

• Accounting is an information system

Designed to communicate financial information

For making economic decisions

• Balance Sheet

Reports the financial position of an entity at a specific moment in time.

• Accounting equation: asset = liability + equity

• Formats include:

Account format: Assets = Liability + Equity

Narrative format (rearranged e.g. A-L = E)

Assets- Resources controlled (not owned) by the entity as a result of past transactions or events

from which future economic benefits are expected to flow to the entity.

Liabilities- Present obligations of an entity arising from past transactions, the settlement of which is

expected to result in an outflow of resources from the entity.

• Income Statement

Reports the financial position over a specific time period. Shows income and expenses.

Income- Increases in economic benefits in the form of inflows of assets or decreases of liabilities that

results in equity.

Expenses- Decreases in economic benefits in the form of outflows of liabilities that result in

decreases in equity.

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Document Summary

The business is always separated from the owner in accounting. Simple to set up: owned by one person, common form of business structure, unlimited liability. Partnership: owned by two or more partners, unlimited liability. Planning - what to do, how to do it --> organising - developing the organisational structure --> Directing - performing according to plan --> controlling - evaluating actual versus planned performance. Financial position: the financial resources controlled by the entity, measure of liquidity and solvency. Cash movements: ability to generate cash flow, focusing on three areas/generated through. Operating activities (provision of and payment for g/s), investing activities (acquisition and disposal of long term assets), financing activities (raising of funds). Basic financial statements: accounting is an information system. Reports the financial position of an entity at a specific moment in time: accounting equation: asset = liability + equity.

Related Questions

In which of the following financial statements would a retained earnings account be found?

Select one:

a. Sole trader.

b. Company.

c. Partnership.

d. None of the options shown would contain a retained earnings account.

A partnership of three siblings would have how many capital accounts in the equity section of the balance sheet?

Select one:

a. One.

b. Two.

c. Three.

d. None.

Which of the following is an advantage of being a sole trader?

Select one:

a. The owner has total autonomy over business decisions.

b. The business is not a separate legal entity.

c. The owner has unlimited liability.

d. The business has limited life.

Partnerships should always have a Partnership Agreement in place to avoid potential disagreements.

Select one:

True

False

If a partner in a partnership decides to leave or retire from the business, the partnership can continue on with no disruption or administrative changes.

Select one:

True

False

pearbat965

QUESTION 1 The knowledge of financial accounting can assist people with decisions such as whether to extend credit to a business. True False 0.2 points Saved QUESTION 2 Employees of a company would not have a reason to use the information provided by financial accounting. True False 0.2 points Saved

QUESTION 3 Financial accounting should be used for assessing the financial health of large organizations only. True False 0.2 points Saved

QUESTION 4 Financial accounting can be helpful for a job candidate who is assessing the financial future of a potential employer. True False 0.2 points Saved QUESTION 5 Lenders might use the information produced by financial accounting when making loan decisions. True False 0.2 points Saved

QUESTION 6 Credit analysts prefer not to use information provided by financial accounting, as it is not accurate. True False 0.2 points Saved

QUESTION 7 Financial accounting is helpful to investment advisors. True False 0.2 points Saved

QUESTION 8 Financial accounting is more useful than managerial accounting. True False 0.2 points Saved

QUESTION 9 The decision to buy or rent equipment is an example of a decision aided by managerial accounting. True False 0.2 points Saved

QUESTION 10 Which of the following statements is true of financial accounting? A. It is used by external parties to make investment decisions. B. It is used to make lease or purchase decisions. C. Managerial accounting is another name for financial accounting, D. It is primarily used to make internal decisions of a business. E. The effectiveness of advertising can be judged using financial accounting. 0.2 points Saved QUESTION 11 The charge for using money over time, often associated with long-term loans, is known as: A. interest. B. principal. C. distribution charge. D. cash dividend. E. preferred dividend. 0.2 points Saved QUESTION 12 Which of the following is a common feature of financial and managerial accounting? A. Both have same objectives B. Both are prepared according to U.S. GAAP C. Both are reported at year end in the annual report D. Both are analyzed by external users while making investment decisions E. Both are used by the management in making decisions 0.2 points Saved

QUESTION 13 Dividends are required to be paid to stockholders on an annual basis. True False 0.2 points Saved

QUESTION 14 An individual who owns one or more shares of stock in a corporation is an owner of that corporation. True False 0.2 points Saved

QUESTION 15 Corporations do not exist as separate legal entities apart from their owners. True False 0.2 points Save Answer

QUESTION 16 It is very difficult to buy or sell ownership shares of a corporation in a stock exchange. True False 0.2 points Saved

QUESTION 17 Stock markets match up investors who wish to buy shares with those who wish to sell them. True False 0.2 points Saved

QUESTION 18 Legal process by which owners of an organization apply to a state government to have it identified as an entity legally separate from its owners is called: A. stocking. B. filling. C. attributing. D. registration. E. incorporation. 0.2 points Saved

QUESTION 19 An advantage of ownership in a sole proprietorship over ownership in a corporation is: A. tax benefits. B. having a board of directors. C. the ability to raise capital through issuance of stock. D. separation of owner and business as legal entities. E. limited liability for debts. 0.2 points Saved

QUESTION 20 Who hires the management of a corporation? A. Stockholders B. Board of directors C. Creditors D. Government E. SEC 0.2 points Saved QUESTION 21 Inventory refers to the: A. excess amount paid for an asset over its fair value. B. intangible assets of a business. C. merchandise bought or manufactured for the purpose of selling. D. amount of net income reinvested by company for future operations. E. revenue generated from investment. 0.2 points Saved QUESTION 22 Investors use financial information to predict whether a: A. company will recruit more employees. B. company's stock price will increase C. company has invested in buildings. D. company will pay salaries. E. company's bond price will increase. 0.2 points Saved

QUESTION 23 Financial accounting can be compared to a portrait. True False 0.2 points Saved

QUESTION 24 Financial statements provide the form and structure for the conveyance of financial information that will create a likeness of the reporting organization. True False 0.2 points Saved

QUESTION 25 The information reported in financial statements must be exact for an investor to make any decision. True False 0.2 points Saved