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Lecture 1-3 Notes - WEEK 1 (Sept 9-12) - COMM 2AA3

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Aadil Merali Juma

COMMERCE 2AA3 Chapter 1: Financial Statements and Business Decisions September 9, 2013  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 o Providing useful information to make economic decisions is most important – anyone can keep the books  Stakeholders – what we call the customers  Exhibit 1.1 – The accounting System and Decision Makers o 2 groups; external and internal o Internal = management; use managerial accounting o External = others; uses financial accounting External Users  Owners – business owners (called investors or shareholders), both current and potential, look for two sources of possible gain: 1. Sell ownership interest in the future for more than they paid 2. Receive a portion of the company’s earnings in cash (dividends)  Creditors – lend money to a company for a specific length of time and gain by charging interest on the money loaned  Difference between creditors and investors o Investors take a risk, in it for good or bad, receive dividends but if company has a bad year they receive less (or nothing) o Creditors have a specific payout, they have a contract, company must make interest payments  Other Groups – accounting information is so that investors and creditors can make important economic decisions; financial accounting doesn’t care about other groups (not useful for them) o Government (eg/ tax purposes, regulations, etc) – financial accounting isn’t important; has own set of books for tax accounting o Financial analysts – work for banks; make predictions and forecasts about the future using the company finances and accounting information; make stock predictions as a service o Customers o Suppliers o Employees and labor unions - Communication – Financial Statements  Primary means of communicating financial information to parties outside the business organization, namely investors  Summarize the financial activities of the business  Available to the public; does not include projections for the future  Most companies prepare financial statements at: o The end of the month o The end of the quarter (quarterly reports) 1 COMMERCE 2AA3 o The end of the year (annual reports)  Monthly – frequent information is good, but will show increases and decreases (businesses are seasonal) and can cause unwarranted worrying; not accurate; at best, estimates  Annual – more accurate because more information is given; better idea of what happens year to year  Prepared according to Generally Accepted Accounting Principles (GAAP) o In Canada, GAAP is developed by the Accounting Standards Board (ASB) of the Canadian Institute of Chartered Accountants (CICA) o Developing GAAP rests on a conceptual framework – a set of objectives, principles and guidelines that help CICA develop GAAP o GAAP has the force of law, particularly for publicly traded firms as Federal and provincial incorporating acts and provincial securities commissions, all support GAAP o Since January 1, 2011, Canadian GAAP was replaced by International Financial Reporting Standards (IFRS)  Canada uses international standards for accounting o iClicker: Generally accepted accounting principles: a) Are accounting rules that are recognized as a general guide for financial reporting b) Have eliminated all errors in accounting c) Are sound in theory but rarely used in real live d) Are accounting rules formulated by the Canada Revenue Agency  Financial Statements: Prepared in this order 1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows o Each statement tells different things  Being rich (having money) ≠ being financially successful (making money)  Could be making money (financially successful) but have a lot of debt (financially UNhealthy) 1. Income Statements (Statement Of Earnings, Statement Of Comprehensive Income) – financial success; ability to make money o Consists of two major groups:  Revenue  Expenses o Net income = revenues – expenses  Net income or net loss o Revenues – earnings from the sale of goods or services  Recognized when services performed or goods delivered  Revenue is recognized with work, not with cash (not at payment, but at sale)  Eg/ when do you recognize revenues for this transaction?  Recognize sale in May  Success in May, but no cash  No success in June, but cash o Expenses – dollar amount of resources used by the entity to earn revenues during a period  Recognize when you use it, not when you pay for it  Some services are prepaid (pay before receive service) (eg/ insurance, meal plan, rent, tuition); some are post paid (pay after service) (eg/ doctor visit, salaries)  Eg/ When will the expense for this transaction be recognized?  Recognize expense in June  Examples of expenses:  Cost of goods sold o Eg/ Buy a laptop for resale for $500; sell it later for $700  Revenue = $700  Expense is called Cost of Goods Sold = $500  Selling and administrative expenses o Salaries, rent, depreciation and amortization, utilities, etc 2 COMMERCE 2AA3  Interest expense o Expense is cost of doing something  Eg/ Salaries = cost of using employees services; rent = expense of using others property; depreciation and amortization = expense of using long term assets VINCOR INTERNATIONAL INC. o Interest expense = expense for using borrowed money Statement of Earnings For the Year Ended March 31, 2013  Income tax expense (In thousands of dollars) o Government is paid income tax expense Revenues o Cost for using public services Sales revenue $ 653,915 o Not applied uniformly; pay based on the Total revenue $ 653,915 income you make; higher income, more Expenses tax, but does not necessarily use Cost of goods sold $ 365,005 government services more Selling and administrative expense 198,905 Interest expense 24,650 o Company Name, Title of Statement, Date Total expenses 588,560 o Date – covers a period of time Income before income taxes $ 65,355  Revenues Income tax expense 16,666  Expenses Net income $ 48,689  Net Income o Do not include assets and liabilities, AR, AP, common stocks etc; MINUS 1 point for each item included that does not belong; 0 if you forget to include something that belongs  Do not confuse Balance Sheet and Income Statement items Vincor International Inc. 2. Statement of Retained Earnings (now part of the Statement Of Changes In Equity under IStatement of Changes in Equity Equity (beginning of the period) Vincor International Inc. FoStatement of Changes in Equity3 + Profit for the year (income from income statement) For the Year Ended March 31, 2013 (thousands) + Other comprehensive income - Dividends Share Retained Other CapitalEarnings Components +/- Other changes, net . Equity (end of the period) Balance as at Jan. 1, 2013 6,266 193,167 (9,996)
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