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Lecture 1

COMMERCE 1AA3 Lecture Notes - Lecture 1: Cash Flow Statement, Financial Statement, Retained Earnings

by

Department
Commerce
Course Code
COMMERCE 1AA3
Professor
Emad Mohammad
Lecture
1

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Chapter 1: The Financial Statements
Accounting - an information system that measures business activities,
processes data into reports, and reports results to decision makers
Basic Objective of Accounting:
To identify and measure the activities of a business entity in order to evaluate its
performance and to assess its financial health; then communicate the results to
stakeholders through a set of accounting reports that contain useful information
so as to help them make rational economic decisions.
Accounting Information can be classified into 2 categories:
1. Managerial Accounting generates inside information for internal use by
management.
2. Financial Accounting provides information for managers inside the business
and for decision makers outside the organization, such as investor and creditors.
Financial Statements
Financial Statements are the business documents that companies use to report
the results of their activities to various user groups. The system of accounting
produces the following statements (to be prepared in this order):
1. Income Statement
2. Statement of Retained Earnings
3. Balance Sheet
4. Cash Flow Statement
Stakeholders: the individuals that use the accounting information
External to Business (Financial Accounting)
Investors/shareholder
Creditors (banks, suppliers)
Government (e.g., CRA and regulators)
Non-profit organizations (the people to donate and the recipients of the
donations)
Customers
Suppliers
Employees and employee unions
Internal to Business (Managerial Accounting)
Management

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Forms of Business Organization
1. Proprietorship—an unincorporated business with a single owner. The
owner has unlimited liability which means that the owner assumes
personal responsibility for the debts of the business.
2. Partnership—an unincorporated business with two or more owners. Each
partner has unlimited liability.
3. Corporation—an incorporated business owned by shareholders whose
ownership is evidenced by the number of shares held. Shareholders elect
the members of the board of directors, which sets policy for the
corporation and appoints officers. A shareholder has limited liability. A
corporation is distinct from its owners and has many of the rights entitled
to a person. Pay less taxes and shareholders are not liable.
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Income Statement
5. Also called the Statement of Operations or Statement of Earnings
6. Reports two main categories
Revenues and gains
Expenses and losses
7. Shows the “bottom line” (Net income or net loss for the period)
8. Net income is the most important item in the financial statements
9. **expenses do not include dividends as dividends are a portion of net
income that one decides to take out of the company
10. Reports revenue and expenses
These accounts are only reported on the Income Statement
11. Shows net income or net loss
If revenues exceed expenses, company has net income
If expenses exceed revenues, company has net loss
Statement of Retained Earnings
Retained earnings is portion of net income company has kept over a period of
years
Positive balance indicates revenues exceeded expenses
Accumulated deficit indicates expenses have exceeded revenues
Net income (or net loss) flows from the Income Statement to the Statement of
Retained Earnings
Open with beginning retained earnings balance
Add net income (or subtracts net loss)
Flows from the Income Statement
Subtract dividends
Report ending retained earnings balance
Balance Sheet
Also called the Statement of Financial Position
Reports:
Assets
Liabilities
Shareholders’ equity
Reports assets, liabilities, and stockholders’ equity
These accounts are reported only on the balance sheet
*Shows that assets equal sum of liabilities and stockholders’ equity A=L+OE
Reports retained earnings which comes from the statement of retained earnings
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