C hapter 1 – The purpose and use of financial statements
• Issue of shares and distribution of dividends does not affect net earnings
• Dividends is reported on Statement of retained earnings
• Common shares are stated in Balance Sheet
• 3 types of activities that companies do:
1. Financing activities => borrowing cash from lenders by issuing debt, paying debt
themselves, issuing shares or distributing dividends.
2. Investing activities => purchasing and disposing long termed assets. Short/long
3. Operating activities => daily operations that include revenues and expenses and
related accounts such as A/R, inventory, and payables.
• Statement of retained earnings – amounts and cases of changes in retained earnings
during the month (+net earnings, - dividends)
• Cash flow statement answers:
1. Where did the cash come from during the period?
2. How was the cash used during the period?
3. What was the change in the cash balance during the period?
• Ending amount in Cash Flow Statement must be the cash amount in the Balance
• Comparative statements – financial statements that are reported for more than one
fiscal period. Used to compare progress.
• Shareholder’s equity – the shareholder’s claim on total assets represented by the
investments of the shareholders (share capital) and retained earnings generated by
Chapter 2 – Framework, presentation and usage
• Foundations of GAAPS (principle based)
1. Separate entity – transactions of business separate from personal transactions of
2. Going concern/continuity – entity is expected to continue its operations. Justifies
use of cost principles
3. Stable dollar/unit-of-measure – only items that can be measured into a monetary
unit can be included. Purchasing power of the unit of measure does not change
4. Time period – life of company can be reported over a series of short time periods
necessary to prepare annual financial statements.
5. Historical cost – assets and liabilities are recorded on a basis of what you piad
6. objectivity – amount used in recording transactions are to be based on objective
evidence rather than subjective judgement. Cash most objective amount. Exchanging object for service is more judgemental. (ex. Exchange a computer
costing $2 500 for $3 000 worth of labour, recording is based on cost of computer)
7. Revenue recognition – revenue be assigned to the accounting period which is
R – risk and reward ownership transfer
C – collectability (will they be able to pay)
M – measurement (how much to record)
P – Performance (meeting expectations of client)
Revenue can be recognized if all four elements are met, this means it could possibly
be written sooner than the actual physical transaction is made. If at any time any
one of these are not met, it cannot