Chapter 2 Investing & Financing Decisions.docx

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Accounting & Financial Management
AFM 101
Donna Psutka

Chapter 2: Investing & Financing Decisions 9/12/2013 1:27:00 PM Concepts Emphasized - primary objective of external financial reporting is to provide useful economic information about a business to help external parties (decision makers), primarily investors and creditors, make sound financial decisions in their capacity as capital providers - Users are most interested in info to assist them in projecting future cash inflows and outflows of a business - principal: initial amount borrowed from a creditor 3 Accounting Assumptions - Separate-Entity - Unit of measure (should be measured and reported in the national monetary unit) - Continuity (going-concern assumption) Basic Accounting Principle - Historical Cost Principle:  recorded at cost price at the time of transaction  PRO – easily determinable cost and can be verified  CON – market value doesn’t change it - Revenue Recognition Principle - Matching Principle - Full Disclosure Principle Elements of the Classified Statement of Financial Position - consolidated: the classified elements of a company’s statement are combined with those of other companies under its control Assets - cash and cash equivalents  cash equivalents: time deposits and placements with original maturities of 3 months or less - short-term investments - trade and other receivables - Inventories - Prepayments - PPE - investment in associates  investment in shares issued by other corporations for the purpose of exercising significant influence over their investing, financing, and operating decisions - financial assets  investments in shares or debt instruments intended to be kept for longer than a year - goodwill  arises when a company purchases another business to control its operating, investment, and financing decisions (the purchase price > market value of assets – leftover is goodwill) - intangible assets Liabilities - trade payables - short-term borrowings - income taxes payable  estimate of the amount of taxes it is expected to pay - accrued liabilities  the total owed to suppliers for various services (rent) - long-term borrowings - deferred income tax liabilities  arises from temporary differences between the profit measured in accordance with IFRS and taxable profit that is determined in conformity with applicable tax laws - provisions  estimated liabilities characterized by uncertainty about the exact amount to be paid and the timing of the payment Equity - share capital  shareholders invest capital  capital gain: when they sell their shares and make a profit - retained earnings - other components  contributed surplus: excess money contributed by shareholders  contributed capital: share capital + contributed surplus  non-controlling interest: shareholder’s equity from companies that the business owns but do not own all the voting shares issued (split from controlling (parent) and non-controlling (minority) shareholders) Transactions - internal events: exchange of assets, goods or services by one party for assets, services, or promises to pay (liability) - internal events: transactions within the business (recording the using up of prepaid insurance) Debt to Equity Ratio = total liabilities / shareholders’ equity - indicates how much debt has been used to finance the company’s acquisition of assets, relative to equity financing that is supplied by shar
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