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AFM101 Lecture Notes - Cash Flow Statement, Cash Cash, Retained Earnings

Accounting & Financial Management
Course Code
Duane Kennedy

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AFM 101
Financial statements: primary means to communicate financial information to parties outside of the
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
Dividends: To receive a portion of the company’s 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

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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:
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 entity’s 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

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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 company’s 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
company’s 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 shareholder’s 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 year’s earnings that investors are willing to
pay for the company’s 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
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