AFM101 Study Guide - Midterm Guide: Cash Flow Statement, Cash Cash, Retained Earnings

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Published on 16 Oct 2011
AFM 101 Midterm Exam Aid
Chapter 1: Financial Statements and Business Decisions
Four Major Financial Statements (FS)
1) The Balance Sheet
The company‟s financial position at a point in time
Balance Sheet
December 31, 2009
(list all assets) $XX
Total Assets XX
(list all liabilities) $XX
Owner‟s Equity/Shareholder‟s Equity
(list owner‟s equity components) XX
Total Liabilities and Owner’s Equity XX
Economic resources of the company, i.e. what the company owns
The company‟s obligations, i.e. what the company owes
Owner‟s Equity/Shareholder‟s 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
Income Statement
For the Period Ended December 31, 2009
(list all sources of revenue) $XX
Total Revenue XX
(list all Expenses) $XX
Total Expenses XX
Net Income XX
Money received from sale of goods, or providing a service
Resources used up by the entity to run the business
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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
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
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 company‟s 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 company‟s
abilities to generate income
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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, shareholder‟s 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
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
Materiality: information from the financial statements that will affect/influence a
user‟s decision is considered material in nature
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