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MGCR 211 Midterm Review

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McGill University
Management Core
MGCR 211
Ralph Cecere

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. 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 companys 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 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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