AFM 101 Lecture Notes [Full Course] File contains succinct and accurate summary of lecture notes taken during class. Arranged chronologically by date for ease of use. Contains notes for the entire semester.
586 views45 pages
September 10th 2008
AFM 101 – Financial Statements & Business Decisions
- Financial accounting focuses on the external users, for internal users there is a separate
accounting course called management accounting.
- External users are: profit-oriented organizations and non-profit organizations (Hospitals and
school count as non-profit organizations).
- A balance sheet shows the financial position of a company at a point in time while an income
statement shows it over time.
- The statement of retained earnings is almost identical to the statement of shareholder’s equity;
it shows the retained earnings of a company over time.
- The cash flow statement reports the inflow and outflow of cash in an organization over time.
- Non-profit organizations have no shareholders.
- Canadian Reserve Agency has authority to force organizations to create specific financial
statements; this power also extends to external users.
The four major statements are a part of GAAP. GAAP differs across countries because principals evolve
differently elsewhere. The sources of GAAPs in Canada are the Accounting Standards Board (AcSB). In
the United States it is the Financial Accounting Standards Board (FASB). Abroad it is the International
Accounting Standards Board (IASB) which uses the International Financial Reporting Standards (IFRS).
In their annual reports, companies have notes that reconcile Canadian GAAPs & International GAAPs
(Numbers remain in Canadian dollars). This is because American investors want to compare them with
American companies. Companies also must do this is they want to trade on the New York Stock
National vs. International
A decision has been made to change Canadian GAAPs to IFRS. Canadian GAAPs and IFRS are very
principal based so there is not too much of a discrepancy between the two. US GAAP however is very
rule based and so there is some controversy on whether or not to make the switch over to IFRS.
The company can select whatever currency they wish to report in.
What does the company own and what do they owe? Assets are resources a company can use to
continue doing business.
Obligations that a company must pay.
Includes Shareholder’s investment and retained earnings
Consolidated = Statements of a parent company and all “her children”
September 12th 2008
Portraying the performance of the company, organization, entity, etc. for a period of time (As opposed
to a point in time like with the balance sheet).
Revenue – Increases in the net economic resources of the company during the period of time from your
activities. We record these revenues when they are earned (Ex. UW Bookstore records as revenue when
they sell you a textbook). If somebody purchases something with credit it still qualifies as revenue.
Expenses – Reduction of the net economic resources over the period of time in the process of earning
those revenues (Ex. Cost of the textbook for the UW bookstore). Offsetting expense against the revenue,
even if something is bought on credit the expense is incurred at the time of purchase.
Net Income – Revenue – Expenses = Net Income. Net Income is a residual concept, what’s left over from
the revenue. Reports can be done quarterly, annually, etc.
Net income/Total number of shares = Earnings per share.
Companies have agreements where they may have to issue more shares, if these agreements come to
fruition then earnings per share become diluted.
Case A - Net Income = $18,000
Owner's Equity = $80,000
Case B - Total Revenue = $92,000
Total Liabilities = $52,000
Case C - Net Income = $(6000)
Owner's Equity = $78,000
Statement of Retained Earnings
Links income statement and Balance Sheet. Net income belongs to owners.
Beginning retained earnings + Net Income – Dividends = Ending Retained Earnings
Retained Earnings is income that has accumulated since the beginning of the company and has not been
paid out to the shareholders.
Cash Flow Statement
There are many parallels between the income and cash flow statement, both measure performance of
the company for a period of time. In this case however it is the cash inflow and outflow that measures
performance. Credit is not counted on the cash flow statement until it is actually received. This applies
for expenses as well in regards to cash outflow.
The cash flow statement contains three sections, Investing, Financing and Operating activities.
Investing activities involves cash going in and out for investments that the company makes (Ex. Buying
equipment). Financing activities involve cash going towards financing the business (Ex. Dividends, loans).
Operating expenses are cash inflows and outflows from day-to-day operations (Ex. Operations, Sales,
Direct Method vs. Indirect Method
Direct –Reports cash received from sales, for fuel, for wages, etc.
Indirect – Starts with net income and adjusts for things that did not affect cash (Ex. Credit)
September 15th 2008
- Market Value (what is the entire firm worth?)/Net Income OR Share Price (market value per
share)/Earnings Per Share.
- Valuation of public companies (public companies are traded on the stock exchange).
- Valuation of private companies (private companies are not traded on the stock exchange). We
can use this ratio to find the value of a company that is not traded on the stock exchange. We
do this by finding similar companies that are traded on the stock exchange. Take the PE ratio of
the comparable companies and multiply it by the Net Income of the private company to
Afm 101 financial statements & business decisions. Financial accounting focuses on the external users, for internal users there is a separate accounting course called management accounting. External users are: profit-oriented organizations and non-profit organizations (hospitals and school count as non-profit organizations). A balance sheet shows the financial position of a company at a point in time while an income statement shows it over time. The statement of retained earnings is almost identical to the statement of shareholder"s equity; it shows the retained earnings of a company over time. The cash flow statement reports the inflow and outflow of cash in an organization over time. Canadian reserve agency has authority to force organizations to create specific financial statements; this power also extends to external users. The four major statements are a part of gaap. Gaap differs across countries because principals evolve differently elsewhere. The sources of gaaps in canada are the accounting standards board (acsb).