ECON 1100 Lecture Notes - Cash Flow Statement, Retained Earnings, Revenue Recognition
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Chapter 1 – The purpose and use of financial statements
•Issue of shares and distribution of dividends does not affect net earnings
•Dividends is reported on Statement of retained earnings
•Common shares are stated in Balance Sheet
•3 types of activities that companies do:
1. Financing activities => borrowing cash from lenders by issuing debt, paying debt
themselves, issuing shares or distributing dividends.
2. Investing activities => purchasing and disposing long termed assets. Short/long
3. Operating activities => daily operations that include revenues and expenses and
related accounts such as A/R, inventory, and payables.
•Statement of retained earnings – amounts and cases of changes in retained earnings
during the month (+net earnings, - dividends)
•Cash flow statement answers:
1. Where did the cash come from during the period?
2. How was the cash used during the period?
3. What was the change in the cash balance during the period?
•Ending amount in Cash Flow Statement must be the cash amount in the Balance
•Comparative statements – financial statements that are reported for more than one
fiscal period. Used to compare progress.
•Shareholder’s equity – the shareholder’s claim on total assets represented by the
investments of the shareholders (share capital) and retained earnings generated by
Chapter 2 – Framework, presentation and usage
•Foundations of GAAPS (principle based)
1. Separate entity – transactions of business separate from personal transactions of
2. Going concern/continuity – entity is expected to continue its operations. Justifies
use of cost principles
3. Stable dollar/unit-of-measure – only items that can be measured into a monetary
unit can be included. Purchasing power of the unit of measure does not change
4. Time period – life of company can be reported over a series of short time periods
necessary to prepare annual financial statements.
5. Historical cost – assets and liabilities are recorded on a basis of what you piad
6. objectivity – amount used in recording transactions are to be based on objective
evidence rather than subjective judgement. Cash most objective amount.
Exchanging object for service is more judgemental. (ex. Exchange a computer
costing $2 500 for $3 000 worth of labour, recording is based on cost of computer)
7. Revenue recognition – revenue be assigned to the accounting period which is
R – risk and reward ownership transfer
C – collectability (will they be able to pay)
M – measurement (how much to record)
P – Performance (meeting expectations of client)
Revenue can be recognized if all four elements are met, this means it could possibly
be written sooner than the actual physical transaction is made. If at any time any
one of these are not met, it cannot be recorded sooner than when payment is made.
•Full disclosure principle
1. Disclose the accounting policies used
2. Disclose items not in the regular or normal activities of the business
3. Disclose items reflecting changes in expectations
4. Disclose what a statue or contract requires to be disclosed
5. Disclose new activities or major changes in old ones
Memorize pyramid**** (exam tip: memorize important aspects a few days prior to exam)
**Classified balance sheet on page 59, use this format on exam
List tangible assets first. Note the adequacy of different types of assets used in the
business, the availability of assets to meet liabilities. List it in order of liquidity and
maturity. Prepaids are always listed last in current assets. Must memorize format.
Order of assets – current, long term investments, property, intangibles.
Definaition of an asset –
1. something that has probable future value that can be measured
2. company can control the benefit from future value through ownership or rights to
use the asset
3. the event that gave the company the ownership or right has already occurred – past
(ex. Advertising is hard to measure the future benefits, thus it is an expense and not an
Intangibles are rights to use something.
Depreciation/Amortization – allocation of asset’s full purchase price t match cost to
revenues over the ensure estimated useful life instead of expensing full cost in the year of
•Amounts owed to others
•Probable future sacrifice of resources
•Based on past transactions
Shareholder’s equity –the value of the sharedolder’s interest in the company is measured as
share capital(shares issued by company as amount invested by investors for shares) and
retained earnings(earnings of the company retained by the company not paid out)
Earnings per share = Net Earnings available to common shareholders / weighted average
number of common shares
Price-earnings ratio = market price per share / earnings per share
**only very few ratios on exam
Liquidity – company’s ability to meet current maturing debts and how quickly the
company can turn asset into cash. Suppliers would be interested.
Class Discussion Questions (p. 85)
a) historical cost principle
b) b) business entity
c) time period assumption/comparability/matching cost principle
d) Understandability/materiality significant enough to make impact to
Statement of earnings
Calculate income tax expense (derived after you made money) which comes after earnings
before income taxes.
Statement of retained earnings
*FOR the year ended
•Ordering of property, plant and equipment does not matter
•If balance sheet does not balance, make it balance for possible extra marks
•Short term investment is more liquid than accounts receivable
Chapter 1 the purpose and use of financial statements. 3 types of activities that companies do: themselves, issuing shares or distributing dividends. Investing activities => purchasing and disposing long termed assets. Short/long term investments: operating activities => daily operations that include revenues and expenses and related accounts such as a/r, inventory, and payables, statement of retained earnings amounts and cases of changes in retained earnings. Used to compare progress: shareholder"s equity the shareholder"s claim on total assets represented by the investments of the shareholders (share capital) and retained earnings generated by the company. Chapter 2 framework, presentation and usage: foundations of gaaps (principle based, separate entity transactions of business separate from personal transactions of owners use of cost principles, going concern/continuity entity is expected to continue its operations. Justifies: stable dollar/unit-of-measure only items that can be measured into a monetary unit can be included. Exchanging object for service is more judgemental. (ex.