AFM 101 Chapter 1 Class Notes Financial Statements and Business Decisions
Four Major Statements
- Balance Sheet
- Income Statement
- Cash Flow Statement
- Statement of Retained Earnings
- Profit-oriented Organizations
shareholders, creditors, finance analyst, union leader
- Non-for-profit Organizations
government, red cross, green peace, hospital, university
Concept of a Business Entity
- An imaginary entity that defines the boundary of financial statement / accounting
- Legal entity
- Legal entity is different than business entity in size
- General accepted accounting principle
- Role: to give the guidance on how to prepare financial statements (i.e. what elements do
you include, and how to figure out the number).
National versus International
- GAAP is different in countries
- This is because they have developed over time; people have done it differently
- AcSB – Accounting Standards Board (Canada)
- FaSB – Financial Accounting Standards Board (U.S.)
- IASB – International Accounting Standards Board
- IFRS – International Financial Reporting Standard
- AcSB, FaSB, IASB, IFRS are all sources that create GAAP
- In CPR annual report, the footnote indicates using Canadian GAAP
- In CNR annual report, the footnote indicates using U.S. GAAP
In order to exchange on New York Stock Exchange, the company has to report using U.S. GAAP
or reconcile into U.S. GAAP.
To exchange on Toronto Stock Exchange, both Canadian and U.S. GAAP are accepted.
Canadian GAAP is changing. They try to move Canadian GAAP over to International Financial
Currency Standards by 2011.
- Manager of a business entity can choose which currency to be reported in
- Issues with transition of currency Balance Sheet
- Assets: economic resources controlled by the entity such as building, cash, and
- Current assets: can be converted into cash within a year. i.e. cash, accounts
receivable, material supplies, future income tax (tax return from the
- Non-current assets: last longer than a year. i.e. auto, building, equipment.
- Liabilities: what do we owe outside of the company
- Current liabilities: have to pay within 12 months. i.e. income tax payable
- Non-current liabilities
- Owners’ Equity: owner’s share
- Shareholders’ Equity: portion of assets that are contributed to the owners
- Share capital: contribution by the owner.
- Retained earnings: income kept in the firm over time.