COMM 293 Lecture Notes - Lecture 1: Retained Earnings, Accounts Payable, Revenue Recognition
Course CodeCOMM 293
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CHAPTER ONE LECTURE NOTES
I THE OBJECTIVES OF FINANCIAL ACCOUNTING
1. Financial statements communicate financial information about a company to
2. There are two groups of primary readers of financial statements emphasized
in this text.
a. Future managers - they interpret the information in financial
statements to make business decisions.
b. Future accountants - they prepare financial statements for managers
and other users such as investors (owners) , creditors (lenders) and
3. It is important to develop an understanding of financial statements, business
operations, and decision making skills.
II UNDERSTANDING THE BUSINESS
A. The Players
1. Managers may be owners (owner-manager) or non-owner.
2. Owners (shareholders) are investors. They may also be managers. Owners
invest money and/or other property in a company in exchange for the
company's shares. The motives for investments are numerous:
a. To meet short-term investment goals by way of periodic dividend
b. To meet long-term investment goals through stock appreciation.
Varying events may cause owners to sell their interest in a company
to "new" owners.
c. To satisfy a strategic initiative gaining insight into the activities of a
3. Additional money for the company may be acquired by borrowing from
creditors. The lenders’ goals are also two fold:
a. To earn interest on the loan.
b. To receive debt repayment.
B. The Business Operations
1. An understanding of business operations is essential for proper interpretation
of a company's financial statements.
2. It is important to know about:
a. Suppliers - the companies from whom goods or services are
b. Customers - the companies or individuals to whom goods or services
3. An understanding of variables outside the entity that could impact the entity
(i.e. interest rates, impact of currency changes, politics)
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C. The Accounting System
1 An understanding of the accounting system and how it processes information
to produce reports is critical.
a. Managerial accounting systems prepare reports for internal decision
b. Financial accounting systems prepare reports for external decision
makers (investors, creditors, suppliers, customers and government
3. Focus is on financial statements prepared for profit-oriented entities.
III THE FOUR BASIC FINANCIAL STATEMENTS: AN OVERVIEW
1. Financial statements should be accurate and should contain adequate
disclosures. Decision makers rely on these statements. If errors are made in
the statements, lawsuits may result from decisions made on these erroneous
2. Financial statements summarize business activities. These reports are
prepared annually. Interim statements may be prepared more frequently
(monthly or quarterly).
3. Understanding business definitions and key relationships is crucial to using
A. The Balance Sheet
1. Appropriate heading
a. Company name - the accounting entity (separate entity assumption).
b. Title - Balance Sheet (BS) or Statement of Financial Position.
c. Date - at a point in time.
d. Unit of measure – Canadian dollars, U.S. dollars, Mexican pesos,
etc., in thousands, millions of dollars, pesos, etc.
2. Purpose is to report the financial position of the Corporation at a point in time.
3. Balance Sheet Equation
ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY
Economic resources Sources of financing economic
Liabilities are amounts owed
Shareholders’ Equity are amounts invested by
shareholders and earnings retained in the
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