Textbook Notes (368,666)
Canada (162,055)
Accounting (248)
ACCT 2220 (54)

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ACCT 2220
Linda Hunter

Accounting Chapter 1 Accounting equation: Assets = Liabilities + owner’s equity Revenues - expenses = net earnings (net loss) Internal users: managers, employees who plan and organize the company (finance, marketing, human resources, and production departments) External users: don’t work for the company (investors, creditors and taxing authorities) Proprietorship: small business, operated by owner, unlimited liability Partnership: similar to proprietorship except there is more than one owner, formal contract, each partner has unlimited liability Corporation: owned by shareholders, limited liability (public corporations distribute financial statements, private corporations don't) Financing: borrowing cash, or issuing shares (note payable, long-term debt) Investing: purchasing and disposing of long lived assets (plant, equipment) Operating: day to day operations (revenues, dividends payable, salaries payable) Income statement: reports revenues and expenses for a period of time -revenues -expenses -earnings before income tax (revenue-expenses) -income tax expense -net earnings Statement of changes in equity: how much of the company's earnings was distributed to you and other shareholders(through dividends) -retained earnings(beginning balance) -add: net earnings -less: dividends -retained earnings Statement of financial position/Balance sheet: shows what a company owns(assets), what it owes(liabilities), and it's net worth(shareholders equity) Assets=liabilities+shareholders equity -assets -liabilities -shareholders equity Statement of Cash flows: shows where a company obtained cash and how it was used -operating activities -investing activities -financing activities Generally Accepted Accounting Principles (GAAP): -rules and practices of accountants -different for publicly-traded(IFRS) and private corporations(IFRS+ASPE) Chapter 2 Assets • current assets; assets expected to be converted into cash or be used within one year (ex: cash, short term investments, accounts receivable, merchandise inventory, prepaid expenses) • non current assets; assets not expected to be converted into cash or be used within one year -investments; not intended to be sold within a year (ex: bonds, mortgages, loans) -property, plant, and equipment (depreciation); tangible assets with relatively long lives, used in operating the business (ex: land, buildings, equipment) -intangible assets -goodwill Liabilities and shareholders’ equity -current liabilities -non-current liabilities -shareholders’ equity -retained earnings Depreciation -spreading the cost of something over a period of time Analyze financial statements (comparisons) 1. intracompany- 2 or more years for same company 2. intercompany- between 2 different company’s 3. industry average- averages for the industry Liquidity ratios: a company’s short term ability to pay off its obligations within the next year (do they have enough to pay their current liabilities) 1. working capital = current assets - current liabilities 2. current ratio = current assets / current liabilities (higher is better) Solvency ratios: a company’s ability to survive over a long period of time 1. debt to total assets = total liabilities / total assets (lower is better) Profitability ratios: a company’s operating success over a period of time 1. earnings per share = profit available to common shareholders / weighted average number of common shares 2. price-earnings ratio = market price per share / earnings per share (higher is better) Conceptual framework -objectives of financial reporting; to provide financial information that is useful for existing/potential investors and creditors 1. relevance 2. faithful representation: reflects economic reality, must be complete and no material errors (material error=something that will change your mind) 3. comparability 4. verifiability 5. timeliness 6. understandability Going concern assumption; the business will continue to operate in the foreseeable future GAAP(generally accepted accounting principles) -Historical cost; assets and liabilities should be recorded at their cost when acquired -fair value; certain assets and liabilities should be recorded at fair value (relevance, and faithful representation) Chapter 3 •
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