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AFM101 Lecture Notes - Accrual, Net Income, Income Statement

Accounting & Financial Management
Course Code
Duane Kennedy

of 7
Accounting and Financial Management
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
Accounting Standards
Influenced by politics, evolve over time, accounting standards different in
every country
Evolution to having lesser/smaller standards
National vs International
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
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
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
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
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
Content of Statement
Statement of Changes in Equity
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