Pre-Midterm Class Notes Full notes from all classes leading up to the midterm. Covers Chapters 1-6, neatly organized, easy to read.

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Department
Accounting & Financial Management
Course
AFM 101
Professor
Shari Mann
Semester
Fall

Description
Chapter 1 • 4 Major Statements o Balance Sheet  o Income Statement o Statement of Cash Flows o Statement of Retained Earnings • Who uses these? o External – General Purpose fls (financial statements)  Investors • interested in cash flow statement to find earnings • statement of retained earning contains dividends •  Creditors • Be repaid (SCF, B/S)  Profit – Oriented Organizations • How can we make money  Not-for-profit Organizations • How can we provide this service best • GAAP o Generally Accepted accounting policies  To ensure fair and equal financial representation o Info in CICA Handbook • Canada moving to international standards 2011 • Currency o Country dependant • Private vs public companies o 85% of companies are private  only users are creditors and lenders o 15% are publicly traded • CICA Handbook o I – International Financial Reporting Standards (IFRSs)  Public companies o II – Accounting Standards for Private Enterprises (ASPEs)  PEs have a choice of IFRSs or ASPEs o III – Accounting Standards for Not-for-Profit Organizations o IV – Accounting Standards for Pension Plans o V – Pre-changeover standards  Material textbook is based on 4 Sheets: COMPANY NAME Document Name Date/ Time period (in x dollars) • Balance Sheet o Assets  Cash  Accounts receivable  Inventories  Prepaid expenses  Plant and equipment  Intangible assets o Liabilities  Bank indebtedness  Accounts payable  Income taxes payable  Long term debt  Future income taxes • Income tax has its own rules o Shareholders Equity  Share capital  Retained earnings o Assets = Liabilities + Shareholders Equity • Income statement o Revenues  Sales revenues o Expenses  Cost of goods sold  Selling and admin expenses  Interest expense o Net income • Statement of retained earnings o Retained Earnings o Net income o Dividends o New Retained Earnings • Cash Flow statement o Cash flows from operating activities o Cash from investing Price-Earnings Ratio • P-E Ratio = Market Value / Net Income o Market value is on shares o Valuation of Public Companies o Valuation of Private Companies Chapter 2 The objectives of financial accounting • Provide financial information to investors and creditors so they an make financial decisions • Relevance o Predictive value o Feedback value • Reliability (choose purchasing price over market value) o Represents faithfulness  Unbiased o Reports the substance of the transaction o Two people will get the same answer • Understandability o A person with base accounting knowledge and business knowledge will understand • Comparability o Compare between periods of same company o compare to other companies Underlying assumptions • Separate entity o Keep transactions separate per entity so better understand how each entity is performing • Unit-of-measure o Single currency • Continuity or going concern o The business is expected to continue to operate for 12 months Principles • Cost o All assets are recorded at the cost actually paid • Revenue o Recognize when earned  When?  Performance is complete • Delivered product / provided service  Measured  Assurance the money will be collected • Matching o Revenue – Expenses = Gross Profit  Expenses: cost of jacket, salaries, rent, utilities etc. T Accounts • Left side is Debit • Right side is credit Manipulation of income • Role of Judgment and Estimates in GAAP o Best estimate on how much money you will collect  Too low means higher income next period  Too high and you increase your income this period • Management incentives to violate GAAP o Paycheck or Bonus based on Income statement amounts • Aggressive / Conservative accounting Debt-to-Equity Ratio Total Liabilities _ Total Shareholders’ Equity • $1000 (500) 500 = 1 o For every dollar of assets, equity finances the same amount as debt • $1000 (200) 800 = 0.25 o $0.25 of debt for every dollar you own • $1000 (700) 300 = 2.33 o Higher ratio, higher risk, less likely to be able to repay Asset Turnover Ratio Sales _ Average Total Assets Return on Assets Net Income _ Average Total Assets AvgAssets Sales Net Income Asset Turnover ROA 1000 15000 1500 15 1.5 1000 25000 4000 25 4 1000 25000 10000 25 10 Increasing an expense means you increase what you have paid out and reduced what you owe. Therefore it is a debit. Chapter 4 Transaction: 1. Analyze + record transation => journal entries 2. Post transactions to general ledger => T-accounts 3. Prepare unadjusted trial balance (T/B) 4. Prepare adjusting journal entries (AJEs) 5. Post AJE’s (to t accounts) 6. Prepare adjusted trial balance 7. Prepare F/S 8. Prepare and post closing entries. a. Close out revenue and expense accounts (temporary accounts) 9. Prepare a post-closing trial balance Adjusting Entries • Deferred Revenues / Expenses • Accrued Revenues / Expenses o Both are in order to account for partially complete transactions (+ or -) • Common Features o Matching principle o Cost principle – cost allocation based on historical cost and how the equipment is used up o Going-concern principle that business will continue to operate in the next year Estimates • What types o Lifetime of equipment o Residual values o Whether money will be collected o If you actually have supplies in exact inventory o Whether insurance/warranty you give your customers will be called on. • Errors in estimates o (-) depreciation expense -> (+) NI -> (+) R/E -> (+) S/E -> (+) A o Depreciation/amortization expense -> Accumulated amortization (contra asset) (+) A • Managemen
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