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COMMERCE 1AA3 Study Guide - Final Guide: Cash Flow Statement, Cash Flow, Retained Earnings


Department
Commerce
Course Code
COMMERCE 1AA3
Professor
Emad Mohammad
Study Guide
Final

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Accounting Exam Notes
The basic objective of accounting is to identify and measure the activities of a business
entity in order to evaluate its performance and to assess its financial health; then
communicate the results to stakeholders through a set of accounting reports the contain
useful information so as to help them make rational economic decisions.
Financial statement are the business documents that companies use to report the results
of their activities to various user groups. The system of accounting produces the following
statements.
Income Statements.
Revenues - expenses = net income
Statement of Retained Earnings.
Beginning + net income - dividends = ending
Balance Sheet.
Assets - liabilities = owners’ equity
Statement of Cash Flow.
Operating cash flows +/- investing cash flows +/- financing cash flows =
Increase(decrease) in cash
Default a loan.
There is a difference between earning revenues and collecting cash. Also incurring an
expense and paying cash.
Income = revenues - expenses.
Cash flow = cash collected - cash paid.
Statement of financial position
Assets
Liabilities
Recognition (Identification)
Measurement (Valuation)
Disclosure (Classification)
Assets Recognition
Future Benefits
R&D Expenses
Rights to future benefits
Human Capital
Quantifiable
Intangible
Assets Recognition
Future Benefits
R&D expensing
Rights to future benefits
Human Capital
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Quantifiable
Intangibles
Assets Measurement
Historical Value
Market Value
Replacement Cost
Net Realizable Value
Present Value of Future Cash Flows
Assets Disclosure
Current Assets
Expected to be converted to cash, sold or consumed in the next year or
within the business’s operating cycle
Liquidable
(Cash, Short-term Investments, Accounts/Notes Receivables, and
Investments)
Long-term Assets
Held longer than a year
(Property and equipment, Intangibles, and Long-term Investments)
Liabilities Recognition
Past transactions
Promise of Payment
Quantifiable
Known Date
Liabilities Measurement
Monetary liabilities
Non-Monetary liabilities
Liabilities Disclosure
Current Liabilities
Debts payable in the next year or within the business’s operating cycle
(Accounts Payable, Income taxes payable, Accrued expenses payable)
Long-term Liabilities
Paid more than one year
(Long-term notes payable, Bonds payable)
Liquidity - ABILITY TO MEET SHORT TERM OBLIGATIONS
Solvency - ABILITY TO MEET LONG TERM OBLIGATIONS
Current Ratio: Current Assets / Current Liabilities = Ratio
Debt Ratio: Total Assets / Total Liabilities = Ratio
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Stockholders’ Equity on the Balance Sheet
Represents stockholders’ ownership of the business assets
Represents residual interest in assets after all liabilities are settled
Consists of:
Common Stock
Contributed surplus/Capital
Retained Earnings
Accumulated other comprehensive income/loss
The Statement of Cash Flow
Measures cash recipients and cash payments
Categorizing into three types of activities
Operating
Cash receipts and payments from selling goods and services
Investing
Purchasing and selling long-term assets
Financing
Issuing stock, paying dividends, borrowing, and repayment of
borrowed funds
Reports cash flows from operating, investing, and financing activities
Results in an increase or decrease
Generally Accepted Accounting Principles
International Financial Reporting Standards
The Conceptual Framework
Objective of financial reporting
To provide useful economic information to external users for decision
making and for assessing future cash flows.
Qualitative characteristics of accounting information
Fundamental Qualitative characteristics
Relevance
Faithful Representation
Enhancing qualitative characteristics
Elements of Statements
Assets, Liabilities, Shareholder’s Equity, Revenues, Expenses, and Net
Income/loss
Periodicity: accounting information is reported periodically
Going concern: business will operate indefinitely
Materiality: Big enough things that offer good knowledge
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