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ACC 100 Study Guide - Midterm Guide: Cash Flow Statement, Free Cash Flow, Retained Earnings

Course Code
ACC 100
Anthony Chan
Study Guide

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Chapter 1
How to analyze ethical dilemmas
1) Recognize ethical situation and ethical issues involved
2) Identify and analyze the main elements in the situation
3) Identify the alternatives, and weight the impact of each alternative on different groups
3 types of organizations:
1) Proprietorships
a. simple to set up and gives you control
b. Personally liable for all debts
c. Pay personal income tax on their share of profits
2) Partnerships
a. often formed because of lack of economic resources
b. Each partner has unique skills
c. Personally liable for all debts
d. Pay personal income tax on their share of profits
3) Corporations
a. More attractive to invest in because ownership is easily transferred
b. Small amounts of money required to invest
c. Easier to raise large amounts of funds
d. Not personally liable for company debts
e. Corporations pay taxes as a separate entity
f. Sometimes receive tax cuts
2 types of users of financial documents:
1) Internal Users
a. Marketing managers
b. Production supervisors
c. Finance directors
d. Company officers
2) External Users
a. Investors
b. Creditors
c. Taxing authorities
d. Regulatory Agencies
e. Customers
f. Labour unions
g. Economic Planners

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Businesses involved in 3 types of activities:
1) Financing Activities
a. Borrowing money and selling shares for cash
i. Notes payable
ii. Bank indebtedness
iii. Long-term debt
iv. Mortgage payable
v. Share capital
*creditors are paid before shareholders in the event of liquidation
2) Investing Activities
a. Buying assets (property, plant and equipment)
b. Investments
3) Operating Activities: (sales revenue, service revenue, interest revenue)
a. Accounts receivable
b. Inventory
Revenues > Expenses = Net Earnings (Net income)
Revenues < Expenses = Net Loss
Statement of earnings reports revenues and expenses to show how successful a company performed
during a period of time
Statement of retained earnings indicates how much was distributed to you and other shareholders of
a company in the form of dividends, and how much was retained in the business for future growth
Balance Sheet Presents a picture of what a company owns (assets), what it owes (Liabilities), and its
net worth (share holders’ equity) at a specific point of time
Cash flow statement show where a company obtained cash during period of time and how the cash
was used.
Statement of Earnings
Reports results over a period of time
EBIT = earnings before income tax
Issue of shares and distribution of dividends do not affect net earnings
o Cash from issuing shares goes to balance sheet under cash not revenue
Normally rounded to the nearest dollar

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Statement of retained earnings
Retained means not paid out to shareholders
Change of retained earnings over a time period
Lenders monitor dividend payments because paying dividends will reduce a company’s ability to
pay its debts
A company looking for rapid growth will pay little to no dividends
The balance sheet
Reports assets and claims to those assets at a specific period of time
Accounting equation
o Assets = Liabilities + Shareholders’ equity
Does the company rely mainly on debt or equity to finance its assets?
Two types of claims on its assets on a balance sheet
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