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Lecture 1

COMMERCE 1AA3 Lecture 1: Chapter-1-Powerpoint-Notes (1)

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Aadil Merali Juma

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Accounting Chapter 1: Presentation
The Basis Objective of Accounting
Identify and measure the activities of a business entity in order to evaluate its
performance and to assess its financial health
Communicate the results to stakeholders through a set of accounting reports that
contain useful information so as to help them make rational economic decisions
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:
o Income statement (Statement of Earnings, Profit or Loss Statement or
Performance/Success of a Company)
How well did the company perform during the year?
Revenue + (gains-losses) -expenses = net income or net loss
o Statement of retained earnings (Statements of Changes in Equity)
Why did the company’s retained earnings change during the year?
Beginning retained earnings + net income (- net loss) dividends = ending
retained earnings
o Balance sheet (Health of a Company)
What is the company’s financial position at year-end?
Assets = liabilities + owner’s equity
o Statement of cash flow (Measure the actual cash that is coming in or out)
Income is NOT CASH
How much cash did the company generate and spend during the year?
Operating cash flows +/- investing cash flows +/- financing cash flows =
increase (decrease) in cash
o Difference Between Revenue and Gains
If you make profit or have an advantage towards something, then it’s a
Revenue and Expense are Ongoing Activities
Gains and Losses are peripheral, non-operating
Revenue and Expenses: Predictable (You know you have to pay a bill next
E.g. You have to keep paying rent expense, You know you have to
have to pay Wages Expense
Losses: Unpredictable
E.g. Earthquake will cause damages to a business, investors are
not able to predict this in advance
o Always look at the intention
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E.g. You bought a piece of land to build a factory but have decided to sell
it and make money (Gain). You bought the land to sell to make money
o Can you have a Negative Retained Earning?
Sometimes included in the statement of changes in owners’ equity
o Are Dividends Expenses?
No, if they are they would be included in the Income Statement,
Expenses must generate revenue
Dividends are a Contra-Equity Account
Income Statement
Also called the statement of operations or statement of earnings
Reports two main categories
o Revenues and gains
o Expenses and losses
Shows the “bottom line”
o Net income or net loss for the period
Net income is the most important item in the financial statements
Reports revenue and expenses
o These accounts are only reported on the income statements
Shows net income or net loss
o If revenues exceed expenses, company has net income
o If expenses exceed revenue, company has net loss
Statement of Retained Earnings
Retained earnings is portion of net income the company has ke[t 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
Opens with beginning retained earnings balance
Adds net income (or subtracts net loss)
o Flows from the income statement
Subtracts dividends
Reports ending retained earnings balance
The Balance Sheet
Also called the statement of financial position
o Assets
o Liabilities
o Stockholders’ equity
Shows that assets equal sum of liabilities and stockholders’ equity
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