Full REVIEW This review consists of 40 pages, includes all important definitions from the book + formulas + other important notes.

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University of Waterloo
Accounting & Financial Management
AFM 101
Duane Kennedy

AFM 101 Financial statements: primary means to communicate financial information to parties outside of the organization. Creditors : The companies or people who lend the money to the company Investors : The companies that buy the corporation or individuals who buy small percentages of the corporation Dividends: To receive a portion of the companys earnings in the form of cash payments Financing activities: the money exchange between the corporation(owners) and its lenders Investing activities: when the corporation sells or buys property or other stuff Suppliers: the companies that the corporation gets all its accessories and ingredients and everything the corporation needs to produce its product Accounting: is a system that collects and processes ( analyzes, measures, and records ) financial information about an organization and reports that information to decision makers Managerial Management accounting : developing accounting information for internal decision makers (detailed plans and continuous performance reports ) Financial accounting system: Creditors Investors Suppliers Customers ( periodic financial statements and related disclosures ) External Users: Profit-oriented Organizations ( RIM ) Not-for-profit Organizations ( Red cross ) The basic Financial statements: 1- The Balance Sheet: reports the financial position (assets, liabilities, and shareholders equity) of an accounting entity at a point in time (cash accounts receivable - plant & equipment - notes payable share capital ) 2- The Income Statements: reports the revenues (income- earnings-operations) less the expenses of the accounting period (sales revenue cost of goods sold selling expenses interest expense ) 3- The statement of retained earnings: (or shareholders equity) reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period (net income from income statement dividends are distributions to shareholders ) 4- The cash flow statement: reports cash inflows and outflows that are related to operating, investing, and financing activities during the accounting period (cash from costumers cash to suppliers cash to purchase equipment cash borrowed from banks ) Accounting Entity: is the organization for which financial data are to be collected The Balance Sheet: Structure: The heading: 1-Name of the entity 2- Title of the statement 3- Specific date of the statement 4- Unit of measure The heading of the statement indicates the time dimension of the report Assets: are economic resources legally controlled by the entity as a result of past transaction and from which future economic benefits can be obtained, Every asset on the balance sheet is initially measured at the total cost incurred to acquire it Liabilities: are the entitys obligations that result from past transactions, they are created from financing provided by creditors (purchase of goods or services on credit and through cash borrowing to finance the company ) Shareholders Equity: are created from financing provided by owners in this case shareholders They come from two sources : 1- Share capital 2- Retained Earnings The Basic Accounting Equation (Balance Sheet Equation) : Assets = Liabilities + Shareholders Equity The Income Statement: (statement of earnings-statement of operations ) : reports the accountants primary measure of performance of a business. Net Income = Revenues Expenses Accounting Period : is the time period covered by the financial statement The Statement of retained earning s: Beginning Retained Earnings + Net Income Dividends = Ending Retained Earnings The Cash Flow Statement: Cash Inflows ( receipts ) Cash outflows ( payments ) Divides Into three primary categories 1- Operations: are cash flows that are directly related to earning income 2- Investments: cash flows related to the acquisition or sale of the companys productive assets 3- Financing Activities: are directly related to the financing of the company itself ( involve receipts and payments of cash to investors and creditors) Note : Bankers consider the operating activities to be the most important because it indicates the companys ability to generate cash from sales to meet its current cash needs( any amount left can be used to repay the bank debt or expand the company ) Relationship among the four statements 1- Net income results in the increase of ending retained earnings 2- Ending retained earnings is one of the components of shareholders equity 3- The change in cash added to the cash balance at the beginning of the year equals the balance of cash at the end of the year The Price/Earning ratio : measures the multiple of current years earnings that investors are willing to pay for the companys shares Price-Earnings Ratio = total Market Value / total Net Income OR Share price of the company / net income(earnings) per share Market (Purchase ) Price = P/E Ratio x Net Income Generally Accepted Accounting Principles ( GAAP ) : Are guidelines for the measurement rules used to develop the information in financial statements The Balance Sheet and Income Statement (cpt 2,3) Conceptual Framework: Objective of Financial Reporting: Communicate information that is useful to investors, members, contributors, creditors and other users in making their resource allocation decisions and / or assessing management stewardship The Separate-Entity Assumption: States that business transactions are separate from the transactions of the owners The Unit-of-Measure Assumption: states that accounting information should be measured and reported in the national monetary unit The Continuity (going-concern) Assumption: states that business are assumed to continue to operate into the foreseeable future The Cost Principle: requires assets to be recorded at the historical cash-equivalent cost, which on the date of the transaction The Periodicity Assumption : means that the long life of a company can be reported in shorter periods The Revenue Principle: states that revenues are recognized when the earnings process is complete or nearly complete, an exchange has taken place, and collection is reasonably assured The Matching Principle: requires that expenses be recorded when incurred in earning revenue Assets: 1- Current Assets ( short term ) : economic resources that will transform into cash or use within the next year or the operating business cycle of the company a- Cash and cash equivalents b- Short-term investments c- Accounts receivable : represent amounts owed by customers who purchased products and services on credit d- Inventory: refers to goods that Are held for sale to customers in the normal course of business Are used to produce goods or services for sale e- Prepaid expenses : reflect available benefits that the company will use within one year f- Other current assets 2- Non-current Assets ( long term ): are considered to be long term because they will be used or turned into cash over a period longer than the next year a- Long term investments: shares issued by other companies that will not be used to produce goods and services b- Property , Plant , and equipment (fixed or capital or tangible assets): includes all land , buildings, machinery and equipment such as tools and furniture that will be used to produce the companys goods & services
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