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Introduction to Financial Accouting.docx

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McGill University
Management Core
MGCR 211
Karen Zajdman- Borden

Introduction to Financial Accounting; MGCR 211 Prof. Borden HF 5636 H68 2011 6 Edition (Reserve) Office Hours: 4:30-5:30 Tuesdays and Thursdays Return of the Mac 1 MAY 2011 Is a company profitable/successful? Accounting answers this question through financial statements Financial information is a FINANCIAL STATEMENT 1) Balance Sheet: Statement of financial Position 2) Statement of Earnings (Income statement) 3) Statement of retained earnings/ in Equity 4) Statement of Cash flow 5) Notes to financial statements Public companies must publish annual reports Management (inside accountants) prepare financial statements (F/S) F/S must be audited for (credibility) Prepared by Chartered Accountants, works for public accounting firm No exact/perfect numbers on f/s CA senses, determines fairness according to GAAP CA hired by board of directors Board of Directors: Don’t go into the company; oversee; make sure that it runs properly; independent Managers: run ABC Company Shareholders, owners: put money into the company GAAP: Generally Accepted Accounting Principles; rules and regulations that (Canadian) CAs must follow; comes from Canadian Institute of Chartered Accountants (CICA) 2011 Canada follows International Financial Reporting Standards (IFRS); US hasn’t adopted it yet , but over 200 other countries have Forms of Business Organizations/Entities Sole Proprietorship: similar to a partnership; simplest; proprietor; 1 owner; unlimited liability; owners’ capital Partnership: similar to sole proprietorship; partners; 2 or more; partners’ capital Corporation: complex; shareholder; Inc/Corp/Ltd; 1 or more; shareholders’ equity Partners $100,000 owners 125,000 Bank loan payable show business plan financial statements creditors loan money Go bankrupt when can’t pay bills; bank can go after 1 person, partners; unlimited liability Corporation 100,000 Owner (Shareholder/Stockholder) 125,000 Bank loan Go Bankrupt, can’t go after shareholders (limited liability) Anything’s possible in partnership Example: one puts in 70% but won’t work as much; other puts in 30% but will do more work; both split profits 50/50=possible (agreement important) Focus of course is on public corporations Private vs. Public Corporation “Boots N Bags Inc.” Private Corporation: friends, family, anyone can say no; not public Public Corporation: shares traded on stock market; anyone can buy/sell stocks Can go Private to Public: Michael Kors just did it; have to file an Initial Public Offering (IPO) Financial Statement Users (external) Creditors: Suppliers want to take minimum risk Shareholders Investors Government (taxes) Banks: decide to lend money or not Securities exchange: regulator when public corporation trades shares Publicly Accountable Enterprise (PAE) must use IFRS (private co. don’t) But good if privates use IFRS for ease of potential investors or want to go public BUSINESS ACTIVITIES Financing Activity (borrowing money) loan from shareholders?, bank, etc f/s: statement of comprehensive income (statement of earnings) “BNB Inc.” Income Statement: results of how successful a company was, operations; usually 1- year period Sales revenue Expenses Revenue-Expenses= +net income; (-net loss) with brackets Statement of Earnings Revenue Inflow: amounts received from operations (sales, revenue, income earned) Expenses  Outflows o Cost incurred trying to generate revenue  Rent expenses  Cost of goods (boots) complicated  Heat/electricity/ utilities  Salaries/wages  Adverting  Interest (on loans)/ finance cost  Taxes: fed and provincial government  Insurance  Promotion  [Dividends are not an expense]  property tax (land and building); municipal government water, snow, garbage, recycling  supplies  Amortization, shown at bottom  Income (at bottom)  Cost of goods sold (shown 1 ) st Operating expenses: 2 categories 1. Selling expenses (adverting, commission salary) 2. General/ administrative (almost everything else) • REVENUES • SALES $XX • EXPENSES • COST OF GOODS SOLD EXP XX • ADVERTISING EXP XX • UTILITIES EXP XX • INSURANCE EXP XX • AMORTIZATION EXP XX • INTEREST EXP XX • TOTAL EXPENSES XX • EARNINGS BEFORE INCOME TAXES EXP XX • INCOME TAX EXPENSE -XX • NET EARNINGS OR NET INCOME XX Calendar Year: January 1 to December 31; 4 months after the year to pay taxes Fiscal year: work on preparing financial statements in slow season; want to cpautre high season;
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