Class Notes (838,028)
Canada (510,640)
Commerce (1,910)
Lecture

Week1_LectureNotes_2013.pdf

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Department
Commerce
Course
COMMERCE 1BA3
Professor
Emad Mohammad
Semester
Fall

Description
Overview of Financial Accounting Learning Objectives After studying this week material, you should be able to: 1. Explain the nature of accounting and its role in decision-making 2. Identify the primary users of accounting information 3. Identify the financial statements and describe information provided to users through each statement 4. Explain the need for generally accepted accounting principles 5. Explain the notion of credibility and the function of auditing 6. Describe public and private accounting in Canada The Basic Objective of Accounting The basic objective of Accounting is 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 all users (stakeholders) through a set of accounting reports that contain useful information so as to help them make rational economic decisions. There are two groups of primary users of financial statements emphasized in this text.  Managers - they interpret the information in financial statements to make business decisions.  Investors and creditors - they analyze financial statements to determine resource allocations of funds for companies in the form of investments that can take the form of equity (shares in the company) or debt. In addition various government agencies require financial reporting as part of the regulatory environment that entities conduct their operations. Financial Statements The Income Statement 1. Reports results of operations for a prescribed period of time 2. The first statement prepared 3. Appropriate heading a. Company name. b. Title: Income Statement (IS), Statement of Earnings, or Profit & Loss Statement. c. Date: for a specified time period ended on the balance sheet date (an accounting period). d. Unit of measure: Canadian dollars, U. S. dollars, Mexican pesos, etc., in thousands, millions of dollars, pesos, etc. 4. Revenues a. These are inflows of net assets from the sale of goods or services in the normal course of business. The inflows may be cash or accounts receivable (the promise of future payments from customers). b. Revenue recognition is in the period that goods or services are sold. This may not be the same period as the collection for those goods or services. (Revenue recognition principle). 5. Expenses a. These are outflows of net assets representing resources used to earn the revenues during the period. Examples: - Cost of Goods Sold (CGS or CoGS) expenses: the costs to buy goods for resale or to make the goods that are sold. - Selling, General & Administrative expenses: other expenses incurred by the company not directly related to the product costs. b. Expense recognition is in the period incurred to earn revenues (the matching principle). This may not be the same period that the payment for the expense is made. 6. Net Income a. This is also called net earnings, profit, or bottom line. b. The income statement equation is: Net Income = Revenues Expenses The Statement of Changes in Equity (This information may be contained in the Statement of Shareholders’ Equity) 1. Prepared after Income Statement because Net Income is used in its preparation 2. Appropriate heading a. Company name b. Title: Statement of Changes in Equity (SCE) c. Date: for a specified time period ended on the balance sheet date d. Unit of measure: Canadian dollars, U.S. dollars, Mexican pesos, etc., in thousands, millions of dollars, pesos, etc. 3. The SCE shows increases and decreases to the retained earnings account for the period and the common or preferred shares for the period 4. The basic retained earnings and shares equation is: Ending RE = Beginning RE +NI or ( -NL)- Dividends Declared Ending Common/Preferred shares = Beginning shares + shares issued – shares redeemed 5. The ending R/E is a part of the Shareholders’ Equity on the Balance Sheet The Statement of Financial Position (Balance Sheet) 1. Prepared after the statement of changes in equity because ending retained earnings and ending shares are included in the shareholders’ equity section 2. Appropriate heading a. Company name b. Title: Balance Sheet or Statement of Financial Position. c. Date: at a point in time. d. Unit of measure: Canadian dollars, U.S. dollars, Mexican pesos, etc., in thousands, millions of dollars, pesos, etc. 3. Purpose is to report the financial position of the Corporation at a point in time. 4. Balance Sheet Equation: ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY 5. Elements of the Balance Sheet a. Assets: these are the result of past transactions that will produce future economic
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