MGCR 211 Study Guide - Midterm Guide: Financial Statement, Matching Principle, Accounts Receivable

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Published on 27 Nov 2012
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Assets
A resource controlled by an entity
The company expects future economic benefits from the use or sale of the
resource
The event that gave the company= control of the resource has already
happened
Liabilities
Items that require future sacrifice
The resource is controlled by the entity
Entity Account
Shareholders' equity= difference between what the investors own and what
the company owes to others
Share capital and retained earnings
Revenue
Inflows of resources to the company that result from the sale of goods and/or
services
o Performance is achieved- there has been some effort gone in from
the seller. Ex. The resturant has to deliver (fulfill) its product before a
revenue can be recognized
o
There should be risk or reward should to deliver to the
buyers from the sellers
The earning process should be substantially
completed (leave a little bit of room for "very likely") Ex. When
you deliver a machine without a user menu.
o Measurable - the buyers and the sellers together agreeing to a price.
Some deals may be contigent to a future event (waiting to know what a
final price would be) Could be still up for determinationd
o Reasonable assurance- a sale will be payable in cash (credit
worthiness, capacity to pay) Does not mean absolute assurance 95%
chance.
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Expense
The resources used in the production of revenues by a company, representing
decreases in the shareholders' wealth
What causes increase in Earnings per Share?
EPS= (Net Earnings/ Average Number of Shares Issued)
Increase in Revenue
Decrease in the number of shares issued
Goodwill under Assets represents the excess paid on investing in shares of another
company.
The excess represents the intangible assets the investments will contribute .
Debt/ Equity I Ratio- Measures the % of assets financed by debt invested in assets
Debt/ Equity II Ratio- Measures the % of debt invested in assets in proportion
to % of equity invested in assets
For Debt/ Equity Ratios, you want it to be under the industry average; however,
it should not be too low--an evidence of under-leveraged.
Times interest earned ratio measures the company’ ability to pay interest from
operating income before interest and taxes.
Financial institutions tend to have larger balances in cash and near cash items,
which would tend to result in a higher quick ratio and normally do not carry
large balances of inventory.
Service organizations normally have large amounts invested in current assets.
Increase in non-current assets and the large inventory balance indicates that
the company is a merchandising or manufacturing company.
o The company’s liquidity is largely dependent upon the nature of the
inventory it holds, the speed at which this inventory can be sold, and
the cash collected.
o If the inventory is not liquid, then the low quick ratio suggests that cash
might not be present to extinguish the current liabilities as they fall due.
Financial Statements
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Income Statement
The income statement is prepared first; it includes revenues and expenses and shows
net income (when revenues exceed expenses) or net loss (when expenses exceed rev-
enues) for the period. The net income or net loss is used to update the next statement,
the statement of retained earnings.
Statement of Retained Earnings
The statement of retained earnings is prepared second; it includes the beginning
retained earnings balance, net income or net loss shown on the income statement, div-
idends, and the retained earnings balance at the end of the period.
Balance Sheet
The balance sheet is presented third; it includes the final balances of each of the ele-
ments listed in the accounting equation. The ending retained earnings balance flows
from the statement of retained earnings to the balance sheet.
Statement of Cash
The statement of cash flows is prepared last; it explains the source/use of cash for a
period under the three cash flow categories: cash flows from operating activities , cash
flows from investing activities and cash flows from financing activities . At the end of
the statement, the net increase or decrease in cash is shown reconciling the beginning
cash balance to the ending cash balance reported on the respective balance sheet.
Accrual Basis of Accounting
Under the accrual basis, revenues are reported when they are earned, not when the
money is received. Similarly, expenses are reported when they are incurred, not
when they are paid.
In accounting, we assume that the business is a going concern, meaning, that it will
operate until it realizes its assets OR based on conservatism, we should account for
an expense, even if it is unclear whether it will be incurred.
Only 1 month of the insurance policy is an expense, based on the matching principle
One month of expense should be accrued, creating an accrued liability of 1 month
of the expense
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