Midterm Review Review package for AMF101 midterm. Notes for all chapters in the textbook.

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Accounting & Financial Management
AFM 101
Donna Psutka

AFM 101 Midterm Exam Aid Chapter 1: Financial Statements and Business Decisions Four Major Financial Statements (FS) 1) The Balance Sheet The companys financial position at a point in time ABC Co. Balance Sheet December 31, 2009 Assets (list all assets) $XX Total Assets XX Liabilities (list all liabilities) $XX Owners Equity/Shareholders Equity (list owners equity components) XX Total Liabilities and Owners Equity XX Assets Economic resources of the company, i.e. what the company owns Liabilities The companys obligations, i.e. what the company owes Owners Equity/Shareholders Equity Two parts: o The amount of financing provided by the owners of the company through share capital o The earnings from the business operations from retained earnings 2) Income Statement How the company operated during the accounting period ABC Co. Income Statement For the Period Ended December 31, 2009 Revenue (list all sources of revenue) $XX Total Revenue XX Expenses (list all Expenses) $XX Total Expenses XX Net Income XX Revenue Money received from sale of goods, or providing a service Expenses Resources used up by the entity to run the business AFM 101 Midterm Exam Aid 3) Statement of Retained Earnings (Statement of Shareholders Equity) Used to calculate the ending retained earnings number for the balance sheet ABC Co. Statement of Retained Earnings For the Period Ended December 31, 2009 Beginning Retained Earnings $XX Add Net Income for period XX Subtract Dividends paid to owners XX Ending Retained Earnings XX When net income is earned every year, the company can choose to: o Distribute all (or a portion) to shareholders in the form of dividends o Retain all (or a portion) to continue to run the day to day business Retained Earnings: the accumulation of all net income NOT distributed as dividends since the first year of business 4) Statement of Cash Flows Used to show the activity of cashall inflows and outflows of company cash by the company during the year Used to calculate the cash balance on the balance sheet ABC Co. Statement of Cash Flow For the Period Ended December 31, 2009 Cash flows from Operating Activities (list details) $XX Cash flows from Investing Activities (list details) $XX Cash flows from Financing Activities (list details) $XX Net Increase/Decrease in Cash XX Cash balance (Jan 1, 2009) XX Cash Balance (Dec 31, 2009) XX 5) Notes to the Financial Statements Required by accounting standards (GAAP) Further explains the numbers in the financial statements Explains accounting policies used by the management of the company Contains supporting schedules and calculations Additional important non quantitative disclosures Ratio Analysis Price/Earnings Ratio = Market Price / Net Income Represents the value an investor thinks this company is worth Investors will multiply the P/E ratio by the companys net income to determine a price one would pay for the company The higher the P/E ratio, the greater confidence investors have in this companys abilities to generate income AFM 101 Midterm Exam Aid Chapter 2: Investing and Financing Decisions and the Balance Sheet The Conceptual Framework The conceptual framework is used to make connections to lead us from the purpose of financial statements to the components and characteristics of FS and the methods and assumptions management use to create the FS. Objectives of Financial Reporting (creating financial statements) To provide useful information to external users of the financial statements so they can make business decisions Elements of the financial statements Assets, liabilities, shareholders equity, revenue, expenses, etc. Qualitative Characteristics of good financial statements Understandability, relevance, reliability, comparability Underlying Assumptions of accounting information Separate entity: each business is accounted for as an individual organization Unit-of-measure: a business accounts for its operations and reports the results using the monetary unit of the country in which it is operatingit is operating in Going concern: a business is expected to continue to operate in the foreseeable future,; there is nothing that suggeststo suggest it will go out of business soon Basic Accounting Principles (GAAP) Cost Principle Revenue Recognition Matching Full Disclosure Constraints of financial reporting Cost-benefit: sometimes we want to collect as much information as possible, but we need to view it on a cost-benefit basis; is it worth the costs to collect the extra information? Materiality: information from the financial statements that will affect/influence a users decision is considered material in nature AFM 101 Midterm Exam Aid Elements of a Classified Balance Sheet Assets Economic resources arising from past transactions Future benefits (i.e. conversion to cash) can be obtained Current Assets Assets that can generally be converted to cash within one year very liquid o Cash and cash equivalents o Short term investments (i.e. shares in other companies, can sell very easily) o Accounts receivable (a promise to pay from a customer or another party) o Note Receivable o Inventory o Prepaid expenses (expenses paid before they are actually used) Non-Current Assets Assets that are generally converted to cash after more than one year o Long term investments o Property, plant, equipment (reported on a net of amortization basis) o Intangible assets (patents, trademarks, licenses, franchises) Formatted: French (Canada) o Goodwill Liabilities Debts and obligations owed to other parties, which will be paid off using assets in the future Current Liabilities Obligations that will be paid within one year o Accounts Payable o Accrued liabilities (i.e. unearned revenue) o Current portion of long-term debt Long Term Liabilities Obligations that will take longer than a year to pay off o Long term debt o Mortgage payable o Bonds payable Shareholders Equity Share Capital Money received from the company issuing its own shares, purchased by the shareholders of the company A form of equity financing, also known as raising money through equity Retained Earnings The accumulation of net income not distributed as dividends since the company began operations Dividends are paid out of retained earnings and distributed to the shareholders as a return on their investment in the company
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