AFM 101 - Chapter 1 Notes.docx

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University of Waterloo
Accounting & Financial Management
AFM 101
Donna Psutka

Chapter 1 Notes 1 Financial Statements and Business Decisions  Financing activities are when exchanges of money occur with lenders and owners (creditors). (pg 2)  Investing activities occur when a business buys or sells property. (pg 2) The Statement of Financial Position  Also known as a balance sheet (prior to introduction of IFRS). (pg 4)  It reports the financial position (assets, liabilities, and shareholders’ equity) of an accounting equity at a particular point in time. (pg 4)  Each asset must have a source of financing so assets must equal the combined liabilities (financing from creditors) and shareholder’s equity (financing from the shareholders). When it is owner’s equity instead of shareholders’ equity, the financing comes from the owner. (pg 6)  Shareholders’ equity stems from 3 sources: 1.) share capital, or the investment of cash and other assets in the business by the owners in exchange for shares; 2.) retained earnings, or the amount of earnings reinvested in the business (and not paid to shareholders through dividends); 3.) other components that Chapter 1 Notes 2 essentially reflect the changes in the value of assets and liabilities over time. (pg 7) If a company goes out of business, assets must be sold off to repay creditors. Creditors have first claim over the assets compared to the owners (or shareholders). Shareholders provide resources for the company to use in the future with no promise of future repayment. They are entitled to what remains after all other claims have been settled. (pg 8) The Statement of Comprehensive Income  The statement of comprehensive income reports the change in shareholders’ equity, during a period, from business activities, excluding exchanges from shareholders. (pg 9)  The income statement reports the revenues less the expenses of the accounting period. (pg 9)  The statement of comprehensive income reports 1.) profit (revenues
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