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Management and Organizational Studies 1023A/B Study Guide - Midterm Guide: International Accounting Standards Board, Cash Flow Statement, Retained Earnings


Department
Management and Organizational Studies
Course Code
MOS 1023A/B
Professor
Maria Ferraro
Study Guide
Midterm

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MOS OCTOBER MIDTERM NOTES
Chapter 1
Accounting: information system that identifies and records the economic events of an organization
Internal users: plan, organize and run companies
External users: investors and creditors are main external users of accounting information
Forms of business organization
o Proprietorships
Simple to set up and gives you control over business
Operated by owner
Only need small amount of money to start business
Own receives any profits, suffers any losses and personally liable for all debts of business
No legal distinction between business as economic unit and the owner
o Partnerships
Similar to proprietorship but more than one owner
Any owner may be forced to use personal assets to pay debt of another
Sometimes, limited liability formed for selected partners
o Corporations
Investor of corporation receive shares to indicate ownership claim
Easy to raise funds
Shares are easy to sell
Shareholders enjoy limited liability; losing only amount they invested into company
Produce far greater revenue
Public corporations: commonly distribute financial statements
Private corporations: don’t issue publicly trades shares
Business activities
o Financing activities
Borrowing money and selling shares in exchange for cash -> main ways to raise funds
Shareholders have no claim to corporate resources until claims of creditors are satisfied
o Investing activities
Purchasing/selling long-lived resources
o Operating activities
Amount earned from sale of goods: revenues
Transactions which create revenue and expenses
Common expenses: COGS, operating expenses, depreciation expense, interest expense and income
taxes
Communicating with users
o Comparative statements: reports information for more than one period
o Statement of earnings: reports revenues and expenses to show how successfully a company performed
during a period of time
Shares and distribution of dividends to don’t affect net earnings
Determines success or failure of operating activities
o Statement of retained earnings: indicates portion of company’s earnings that was distributed to you and
shareholders of company in form of dividends and how much was retained in business to allow future growth
Dividends reported here
o Balance sheet; presents snapshot of what company owns, owes and its net worth at specific point in time
Determines likelihood that creditors will be repaid
Managers look for whether cash on hand is sufficient, inventory is adequate for future sales and
whether relationship between total liabilities and equity re best proportion of debt and equity
financing
o Cash flow statement: show where company obtained cash during period of time and how cash was used

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Provides answers to
Where did cash come from during period?
How was it used?
What was change in cash balance?
Relationship between statements
o Statement of retained earnings depends on statement of earnings
o Balance sheet and statement of retained earnings are interrelated
o Cash flow and balance sheet are interrelated
Elements of annual report
o Publicly traded companies must give shareholders annual report
o Includes useful nonfinancial information about company and financial information
o Normally include management discussion and analysis statement of management responsibility for financial
statements, auditors’ report, comparative financial statements, notes to financial statements and historical
summary of key financial ratios and indicators
Chapter 2
Conceptual framework of accounting
o Objective: ensures existing standards and practices are clear and consistent
o Easier to solve and identify problems
o Makes financial statements more relevant, objective and easier to compare
International accounting standards Board (IASB) used to reduce differences and unify global standard setting
o Canada uses Accounting Standards Board (AsBC)
Conceptual framework of accounting
o The objective of financial reporting
Provide information that is useful to individuals who are making investment and credit decisions
Should provide: timing, amounts and uncertainty of future cash flows, assets and liabilities/ equity
o Qualitative characteristics of accounting information
Relevance
Make difference in user’s decision
Confirm and correct previous expectations
Timely, must be available to decision makers before it loses ability to influence decision
Faithful representation
Must present economic substance of transaction, not just legal form
Verifiable: same answer after several people review
o Values are estimates
Neutral: no bias
Complete: all info needed to represent economic reality
Comparability
Similar business circumstances use same accounting standards
Enables users to identify similarities and differences
Should be able to compare financial results over time
Can change standards only if change is required by AcSB o if it’ll provide more relevant info
Understandability
One standard: more global users can understand
Financial reports focus on info needs of creditors and investors
Users without understanding and ability need professionals
Greater when info is classified characterized, presented clearly and concisely
Elements of financial statements
o Assets, liabilities, equity, revenues and expenses
Recognition and measurement criteria
o Classify recognition and measurement criteria: assumption, principles and constraints
o Assumption: create foundation of accounting process

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Monetary assumptions: requires only things that can be expressed in money
Economic entity assumption: identified with particular accounting unit which is separate and distinct
from activities of shareholders and all economic entities
Transactions should be kept separate even if companies are related
Time period assumption: life of business can be divided into artificial time periods and useful reports
covering periods can be prepared
Publicly traded companies report to shareholders every 3 months
Interim periods: essential for timely and relevant decisions
Going concern assumption: states business will remain operation for foreseeable future
Makes short/long-term assets/liabilities
Should not be used when liquidation of business is likely
o Principles: indicate economic events
Cost principle: dictates assets be recorded at cost at time of acquisition
Full disclosure: all circumstances and events that make difference to financial statement be disclosed
Respected by providing data contained in financial statement
o Constraints: make possible to relax principles under circumstances
Materiality: related to financial statement item’s impact on company’s overall financial
condition/operations
Should include all information that is material
Immaterial if including or not will not impact decisions
International standards does not include quantitative decision
Cost benefit: ensures value of info is greater than cost of providing it
Balance sheet: snapshot of company’s financial position
o Classification helps determine whether company has enough assets to pay debts
o Claims of short/long-term creditors on company’s total assets
o Assets: resources company owns that will provide future economic benefits
o Current assets: expected to be converted into cash/sold/used in 1 year
o Property, plant and equipment: usually listed in order of permanency
o Long-term investments: multi-year investments in debt/equity
Long-lived assets such as real estate not used in company’s operating activities
o Intangible assets: not seen but very valuable
Represent a privilege or a right granted to
Divided into 2 groups: definite/indefinite
Amortization: used for intangibles
Depreciation: used for assets
o Current liabilities: obligations paid in coming ear listed in order they’re paid in
o Long-term: often report long term debt maturing after one year as single amount
o Share capital: common shares of preferred shares
o Retained earnings: cumulative earnings that have been retained for use
International uses reverse-liquidity more
Using the financial statements
o Ratio analysis: gives clue about underlying conditions
Intracompany: covering two years for the same company
Intercompany: based on comparisons with a competitor in the same industry
Industry average: based on average ratios for particular industries
o Profitability: measures earnings/operating success of company for specific times
Earnings per share: measures net earning for common share
Unless its preferred shares, net earnings for common shares is same as et earnings on statement of
earnings
Price earnings ratio: measures ratio of stock market price of common share to earnings per share
Using the balance sheet
o Liquidity: measures short-term ability of company to pay maturing obligations and to meet unexpected needs
for cash
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