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Quicknotes for Midterm 1 - COMM 2AA3
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Department
Commerce
Course
COMMERCE 1BA3
Professor
Aadil Merali Juma
Semester
Fall

Description
MIDTERM 1 COMM 2AA3 Quick notes – Theory; no examples October 11, 2013 Chapter 1: Financial Statements and Business Decisions  Basic objective of accounting – to identify and measure the activities of a business entity in order to evaluate performance and assess financial health; then to communicate the results to stakeholders through a set of accounting reports that contain useful information so as to help them make rational economic decisions External Users  Owners – (investors, shareholders); current and potential; look for two sources of possible gain 1. Sell ownership interest in the future for more than they paid 2. Dividends – receive a portion of company’s earnings in cash o Associated with Risk  Creditors – lend money to a company for a specific length of time; gain by charging interest on money loaned o Not associated with risk; contract binds company to specific payout  Other Groups (not important) – government (tax, regulations), financial analysts, customers, suppliers, employees and labor unions Financial Statements – communication  Primary means of communicating financial information to parties outside organization; summarize financial activities of business  Prepared at end of month, quarter (quarterly), year (annually)annual shows broader picture, more accurate; monthly can cause unwarranted worry  Generally Accepted Accounting Principles (GAAP)  replaced by International Financial Reporting Standards (IFRS) 1. Income Statement/Statement of Earnings  financial success o Covers a period of time o Revenue – earnings from the sale of goods or services; increase in assets or settlement of liabilities from ongoing operations;  Revenue recognition principle – recognize when service performed or goods delivered (not with cash payment) o Expenses – dollar amount of resources used by the entity to earn revenues during a period  Matching Principle – recognize when service used or good received (not with cash payment) o Net Income = Revenue – Expenses 2. Statement of Changes in Equity (IFRS)/Statement of Retained Earnings (GAAP) o Ending RE = Beginning RE + Net Income – Dividends Equity (beginning of period) + Profit for the ye(income from I/S) + Other comprehensive income - Dividends +/- Other changes, net Equity (end of period) 3. Balance Sheet/Statement of Financial Position (IFRS)  financial health o Reported for a point in time (not a period) o Assets = Liabilities + Shareholders Equity o Assets – economic resources controlled by the entity as a result of past transactions from which future economic benefits may be obtained; listed in order of liquidity  Cash, A/R, inventory, prepaid expenses, long term investments, property/plant/equipment (PP&E), intangible assets o Liabilities – debts or obligations of the entity that result from past transactions, the settlement of which may result in transfer or use of assets, provision of services or other yielding of economic benefits in the future; listed in order of maturity  A/P (usually due within 30-6, short term N/P(<1 yeaaccrued liabilities, long-term liabil(>1 year) o Shareholders Equity – amount of financing provided by owners of the corporation and from earning(ending equity from statement of changes in equity)  Share Capital – amounts invested in business by owners (purchase of stocks)  Retained Earnings – past earnings not distributed to owners 4. Statement of Cash Flow  liquidity o Revenues do not always equal cash collected; expensed do not always equal cash paid  net income not equal to changes in cash o Sources and uses of cash during a period; cash in and out regardless of revenues o Accrual Basis o Organized around business activities  Financing Activities – related to liabilities and SE  Investing Activities – purchases and sales of assets  Operating Activities – profit-generating activities  Notes – provide supplemental information about the financial condition of the company o Describe accounting rules applied o Present additional details about an item on the financial statement o Provide additional information about an item not on the financial statement Chapter 2: Investing and Financing Decisions and the Statement of Financial Position  Conceptual Framework  Objective of Financial Reporting – provide useful economic information to external users for decision making and for assessing future cash flow o Riskier cash flow – less valuable  Qualitative Characteristics  must have to be useful 1) Fundamental Qualitative Characteristics 1) Relevance – predictive value; confirmatory value 2) Faithful Representation – complete, neutral, free from error 1 MIDTERM 1 COMM 2AA3 2) Enhancing Qualitative Characteristics 1) Comparability – uniformity (accounting methods; unit of measure), sufficient disclosure 2) Verifiability 3) Timeliness 4) Understandability  Elements of Statements o Assets o Liabilities o Shareholders Equity o Revenues o Expenses o Gains – increase in assets or decrease settlement of liabilities from peripheral transactions  Different from revenue – revenue is from ongoing operations (constant, predictive) o Losses – decrease in assets or increase settlement of liabilitiesfrom peripheral transactions  Different from expenses –expense is from ongoing operations (constant, predictive)  Recognition and Measurement Criteria o Assumptions – unit of measurement, separate entity (business and owner, periodicity, going conce(business will continue, not liquidate) o Principles – historical cos(recognize assets at original acquisit, full disclosure, revenue recognition, matching principle o Constraints – cost-benefits, materiali(significance of an item to a business, dependent on individuals judgment)  Statement of Financial Position o Assets  Recognition (Identification) – future benefits (exception to research and development expensing), rights to future benefits (exception to human capital), quantifiable (exception to intangibles)  Measurement (Valuation)  Historical Cost – acquisition and all other costs to make asset ready for use o Justification – going concern, prudence, objectivity/verifiability  Market Value o Replacement cost (entry value) – cost to replace an existing asset with another similar asset that provides the company with the same future benefits (difficult to obtain similar asset) o Net realizable value (exit value) – net amount of c(selling price less sellinthat a firm would receive currently if it sold the asset (difficulty with availability of second hand market; hard to verify)  Present Value (PV) of Future Cash Flow (FCF) o Monetary Asset – future benefits realized in fixed amounts of cash; measured by expected (future) cash flows or PV of cash flow (long-term PV of FCF eg/ notes receivable; short term FCF eg/ A/R) o Non-Monetary Asset – measured at historical costs (inventory and PP&E)  Disclosure (Classification)  Current Assets – assets that will be used or turned into cash (normally within one year) o Cash, short-term investment, A/R, inventory, prepaid expenses (order of liquidity)  Non-Current Assets – long-term; used to turn into cash over a period of longer than 1 year o Long-term investments, PP&E (cost – accumulated amortization)  Intangible assets (eg/ copyright, trademark) o Liabilities  Recognition (Identification) – past transactions, promise of payment, quantifiable, known to date (ST or LT)  Measurement (Valuation)  Monetary liabilities – future cash flows or present value of future cash flows  Non-monetary liabilities – expected cost of goods and services or the money received  Disclosure (Classification)  Current liabilities – due within 1 year or operating cycle (whichever is longer) o Bank indebtedness, A/P, accrued liabilities, current maturities of long term debt  Long-term liabilities – due within 1 year or operating cycle (whichever is longer) o Notes payable, mortgage payable, lease obligations, bonds payable o Ratio Analysis – tool of analysis; vertical (same financial statement) or horizontal (over time) o
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