Accounting and Financial Management.docx

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Accounting & Financial Management
AFM 101
Duane Kennedy

Accounting and Financial Management (AFM101)  Financial Accounting  Doing accounting for user’s outside of the company(shareholders, potential shareholders)  Very important, helps decide where to allocate money, whether to buy shares, where to buy shares  Importance of Financial Accounting  (E.g. pension plans deciding where to invest money, analyse financial statements to decide where they’re going to invest money, be able to understand financial statements, whether company is a winner or a loser)  User Perspective  Understand annual report, broad perspective, understand company’s financial condition Resources: LEARN, Tutorials, Tutoring-in-Residence Program Chapter 1  Financial Statements (Five major statements)  Income statement  Statement of comprehensive income  Statement of changes in equity  Cash flow statement  Statement of financial position  External Users  Profit-oriented Organizations  Focus on course: Standards of Canadian profit-oriented organizations  Not-for-profit Organizations  Goal is not to make profit (E.g. hospitals, charities, colleges and universities)  Accounting Standards  Role  Influenced by politics, evolve over time, accounting standards different in every country  Evolution to having lesser/smaller standards  National vs International  Reasons  Sources  In Canada, three sources: international financial reporting standards (IFRS), used in 120 countries around the world created by IASB (International Accounting Standards Board)  In US, Financial Accounting Standards Board (FASB) – US generally GAAP  AcSB – Canadian GAAP  Canadian Accounting  Public Companies – shares traded on the stock exchange (E.g. Toronto Stock Exchange, RIM)  IFRS became standard for public companies because various laws for provincial governments made it more difficult, IFRS became part one of handbook  Private Enterprises  Trying to make profit  Can be fairly big/small  Privately owned  Not traded on stock exchange  Not-For-Profit Organizations  Pension Plans  Has to be sizably large  Have to report to accountants and money handlers  Statement of Financial Position o Assets  Current assets  Non-current assets: not used  Total assets o Liabilities  Financing provided by people who are not owners of company  Current liabilities : have to be paid within 12 months  Non-current liabilities : everything that isn’t a crurrent liability o Owner’s Equities  Financing of company that has been provided by owners  Shareholders Equity o Assets = liabilities + Owner’s Equity Income statement - Measures performance over a period of time  Revenue o Record revenues when they are earned o Earn revenue having sold stuff o Increase in assets/economic resources from ordinary activities of the business  Expense o Decrease in assets/economic resources resulting from activities needed to generate revenue o Offset against revenues o Recognize expenses as you recognize revenues o Record expenses as you use up good, services to generate revenue  Net income = Revenue – Expenses o What’s left over from the revenue o Net income = net earnings Statement of Comprehensive Income -Change in owner’s equity during that period as a result of business activity , does not include investments owners have made during the period -Start with net income, add or subtract other items that are going to affect/change owner’s equity -Net income affects owner’s equity, not paid out as dividends  Role  Content of Statement Statement of Changes in Equity  Role  Concept of Retained Earnings Linking net income which affects owner’s equity, net income affects retained earnings, earnings that have been retained from the company Beginning R/E + Net Income - Dividends Paid (Any dividends that were paid out during the period) = Ending R/E Cash Flow Statement  -When is the cash actually changing hands, income statement = when is the revenue earned and when is the expense incurred  Cash flow used in Operating activities  Cash flow used in Investing activities  Cash flow used in Financing Activities Small businesses work on cash basis, large businesses work on revenue basis/income basis  Revenues versus Cash Received o Receiving cash from the company (E.g. Tim Horton’s receive cash when someone uses gift card) o Revenue is providing the service, cash received becomes revenue when you provide service, when you use the gift card  Expenses versus Cash Paid o Cash paid is cash out the door, when you pay for clothing to fill your store o Only recognized as expense when they sell the clothing  Direct versus Indirect method o Direct method: recording cash directly as it comes, recording cash received from sales, cash outflow from salaries, cash outflow for rent, cash outflow for electricity o Indirect method: Net income, adjust +/- for items on the income statement that did not affect cash, didn’t collect cash from sales because some people postpone payment, haven’t paid for all the merchandise yet, haven’t paid for electricity yet  Price-Earnings Ratio o P-E Ratio = Market Price per share/ Earnings per share  Helps us evaluate the market value of a company  Share price divided by earnings per share  E.g. EPS = $2.73, share price = $3
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