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Midterm Review

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Carolyn Mac Tavish

Financial Statements and Business Decisions What is accounting? -The identification, measurement and communication of financial information about economic entities to interested persons -Information on results of economic activities (operating, investing, financing) -Record, measure, classify, summarize, communicate, interpret and analyze -Lets you know if a company is doing well -More than just bookkeeping -Types of accounting: -Financial accounting: -External users -Investors and predators -Care about GAAP -Managerial accounting -Internal users -Dont care about GAAP as much -Types of accountants -Public auditing companies, KPMG -Private working in a firm Statement of Financial Position Balance Sheet -Shows the financial position of the firm at one point in time -Should balance -Depreciation and amortization are the same Assets = Liabilities + Shareholders Equity ASSETS LIABILITIES SHAREHOLDERS EQUITY -Resources controlled by entity -Obligations due by entity -Owners residual (leftover) -Transaction has to take place = -Result of past transaction + interest in firms assets after -Expected to benefit future -Expected to cause firm to deducting liabilities -Have to be worth something payout assets or render -Only when a corporation -Ex. Accounts receivable, services in future otherwise called owners inventory, cash, land, -Ex. Notes payable, accounts equity equipment, etc. payable (paid within a year) Structure This is the structure for the heading: 1. Name of the entity - The Nestle Group 2. Title of the statement Statement of Financial Position 3. Specific date of the Statement At December 31, 2009 4. Unit of measure (in millions of Swiss francs) -Accounting entity the organization for which financial data are to be collected -Trade receivable a promise of future payment -Shareholders equity is made up of: -Share capital the investment of cash and other assets in the business by the owners in exchange for shares -Retained earnings amount of earnings reinvested in the business -Other components reflect the change in the values of assets and liabilities over time The Statement of Comprehensive Income Income Statement -Summary of how well an entity performed during a specific period -Heading line says For the year ended ___ Revenues Expenses = Profit Statement of Comprehensive Income Revenues -Expenses Profit + Other comprehensive income Comprehensive Income Revenue -Increases in economic resources (equity) due to firms ordinary activities -Ex. Sale of goods/services, rent/interest from letting others use firm assets -Not due to investments by owners -Think of what are they in the business of doing? only then it goes on revenue. Ex. University is in the business of selling education, only that goes on revenue not if they sell a desk -Earnings from the sales of goods or services -Revenue is recognized in the period in which goods and services are sold, not necessarily the period in which cash is received -Ex. $1000 sale made on May 25 and the cash was received on June 10 it is then recognized in May -Revenue is art of retained earnings Expenses -Decreases in economic resources (equity) due to firms ordinary activities -Caused by revenue-generating activities -Not due to withdrawals by owners -Withdrawals from owners comes from retained earnings The Statement of Changes in Equity -Reports all changes to shareholders equity during the accounting period -Retained earnings reflect the profits that have been earned since the creation of the company but not distributed yet shareholders as dividends -The dollar amount of resources used up by the entity to earn revenues during a period -An expense is recognized in the period in which goods and services are used, not necessarily the period in which cash is paid -Ex. Paid $75 cash on May 11 for newspaper ad and the ad appears on June 8 Create a prepaid advertising account in May and then it is recognized as an expense in June, and decrease cash asset in May as well. Beginning retained earnings + Profit Dividends = Ending Retained earnings Statement of Changes in Equity Equity, beginning of the period + Profit for the year +Other comprehensive income - Dividends +/- other changes, net Equity, end of period The Statement of Cash Flows -Divides it into cash inflows (receipts) and outflows (payments) into three primary categories: cash flows from operating, investing, and financing activities -Cash inflow and outflow money in and out of pocket -Cash is king - need to have a good cash flow -Cash flows from operating activities are cash flows that are directly related to earning income Ex. Paying salaries -Cash flows from investing activities includes cash flows related to the acquisition or sale of the companys productive assets Ex. Purchase of additional property -Cash flows from financing activities are directly related to the financing of the company itself Ex receipts and payments of cash to investors and creditors Statement of Cash Flows +/- Cash flow operating +/- Cash flow investing +/- Cash flow financing activities Change in cash Summary of the Four Basic Financial Statements Financial Statement Purpose Examples of Content Statement of Financial Position Reports the financial position of an Cash, trade receivables, plant and Balance Sheet accounting entity at a point in time equipment, notes payable, share capital Statement of Comprehensive Income Reports the profit achieved during the Sales revenue, cost of sales, selling accounting period as well as income and expense, interest expense expense items that are not recognized in profit what you made during the period Statement of Changes in Equity Reports the way that elements of Retained earnings, elements of comprehensive income, dividends, and comprehensive income, distribution of changes to share capita affected the dividends, increase in share capital financial position of the company during the accounting period Statement of Cash Flows Reports inflows (receipts) and outflows Cash collected from customers, cash (payments) of cash during the paid to suppliers, cash paid to purchase accounting period in the categories equipment, cash borrowed from banks operating, investing, and financing The International Financial Reporting Standards (IFRS) -International Financial Reporting Standards guidelines for the measurement rules used to develop the information in financial statements -Securities and Exchange Commission in the U.S. government agency that determines the financial statements that public companies must provide to shareholders and the measurement rules that they must use in producing these statements -Ontario Securities Commission the most influential Canadian regulator to the flow of financial information provided by publicly traded companies in Canada -Accounting Standards Board the private-sector body given the primary responsibility to work out the detailed rules that become accepted accounting standards -International Accounting Standards Board a independent standard-setting board that is responsible for the development and publication of IFRS Management Responsibility and the Demand for Auditing -Three safeguards and a management certificate are required for all Canadian companies with publicly traded shares -Management Certificate indicates managements primary responsibility for financial statement information and he steps to ensure the accuracy of the companys records -Audit report describes the auditors opinion of the fairness of the financial statement presentations and the evidence gathered to support that opinion -Audit an examination of the financial reports to ensure that the represent what they claim and conform with IFRS -Three steps to ensure accuracy of records: system of controls, external auditors, board of directors Statement of Owners Equity (ASPE) -Used for partnerships/proprietorships -Unincorporated businesses -Link the balance sheet and income statement called Statement of Changes in Equity (IFRS) Linkage Between Financial Statements Income statement v Net income Statement of Retained earnings v Retained earnings ending balance Balance Sheet ^/v Cash beginning and end Statement of Cash Flows
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