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ACC100 - Supplementry Notes - Ch.1.pdf

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Department
Accounting
Course
ACC 100
Professor
Ron Babin
Semester
Fall

Description
Supplementary Lecture Notes ACC100 – Chapter 1 © Bradley MacMaster , BSMBA, CA, CMC [email protected] (Lecturer in Accounting, Finance, Marketing Research & Leadership) C ONTENTS 1 | CONCEPTS NECESSARY TO UNDERSTAND FINANCIAL STATEMENTS (‘F/S’).......................... 2 2 | BUSINESS PERFORMANCE CRITERIA...................................................................................... 3 3 | INFO IN THE FINANCIAL STATEMENTS FOR EVALUATING PERFORMANCE........................... 4 Illustration Caveats...................................................................................................................5 Some Questions to Test Your Understanding.............................................................................5 A Note fromBrad: Hey - If you “get this”, the rest of the course will be easy ! (Promise). st We’ll go over this in the 1 lecture as if it was the beginning of a “story of a business entity”. This is your frame of reference for why accounting has valueand makes any sense at all. Read Ch.1, then … Read this ! Discuss it ! Learn it ! Understand it well enough to use it by thinking like an “external user” ! Do you understand this stuff ? If not, review it after my 1 lecture. 1 | C ONCEPTS NECESSARY TO UNDERSTAND F INANCIAL S TATEMENTS (‘F/S’) Business Entity – an organization of people and other resources (all of which have a cost) assembled to achieve a ‘purpose’ with the expectation of economic gain (i.e. over and above the various costs) by conducting various activities. Purpose – market purpose is entity specific – relates to providing something of value (goods or services) to a market. Intent – economic gain: providing value for a price that exceeds cost and provides a reasonable ‘return-on- investment’. Activities – operating, investing, financing Transaction – an economic exchange (two sides to it) … youget something and give something up in return. Stakeholders – organizations and individuals that have an interest (a “stake”) in the particular business entity’s success; this includes internal and external users of financial information, and others; in some cases (e.g. organizations or individuals that provide capital to finance the business) their “stake” is their investment or money which is at risk. External Users – providers of capital and anyone else interested in the entity’s financial performance that do not work inside the business and have ready access to internal information. Usually, they are strongly interested in CASH (now and later) ! Also, be aware of agency problem (ethics). Agency Problem – capital providers are generally not involved in running the business day-to-day; they appoint management to do so, to generate planned or expected performance; management gets to write their own report card (the financial statements) … so they have a potential conflict in making themselves look good. Why ? To keep their job, get raises and bonuses; this is at the root ofmost ethics issues in accounting and what creates the need for transparency, full disclosureand audits ! Shareholder – an owner or part-owner; “holds” “shares” in an incorporated business; acquires these shares in exchange for an investment in the business entity (usually in the form of cash). THEREFORE … they are entitled to the net or residual financial gain from the business enterprise !!! Shareholders are one class of external user and therefore stakeholders. Financial Decisions – (1) buy / invest / lend / get-in; (2) hold / “let itride”; (3) sell / get-out / take your winnings (losses) Performance (VERY BASIC CRITERIA) to substitute for the lame question: “How is the business doing ?” and avoid the possible answers of “Good !”, “Ok”, “Not so good”, or “I have no idea”, none of which helps users to make financial decisions ! (see section 2 following) ACC100 – Ch.1 SUPPLEMENTARY LECTURE NOTES B. MacMaster – 01/11 2 | 5 2 | B USINESS PERFORMANCE C RITERIA WHY is it important to assess a business entity’s financial performance ?  Capital providers put cash into a business and they desire cash back in two forms:  return-on-investment (e.g. dividends, interest, rent, royalties)  return-of-investment (e.g. share capital, loan principal, cost of real property, cost of certain intangibles)  This can only happen if the business entity generates favourable net cash flow (i.e. more cash flowing into the entity than flows out). The most important criteria employed by external users to assess a business entity’s performance include: Primary /common Secondary *  Growth  Cost management  Profitability  Productivity (efficiency)  Liquidity  Financial leverage  Solvency  Stock valuation * Equally as important in comprehensive financial analysis, but not typically emphasized in introductory courses. Let’s gain a better understanding of where the primary performance evaluation criteria come from (when your curiosity is sufficiently piqued, you can investigate both the primary and secondary evaluation criteria on your own – see the inside front cover of your text and Ch. 13):  The most important source of cash flow for the business entity is profit (the excess of revenues over expenses) from the business’ operating activities (the day-to-day p
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