Chapter 2 notes.docx

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University of Waterloo
Accounting & Financial Management
AFM 101
Donna Psutka

Chapter 2 – Investing and Financing Decisions and the Statement of Financial Position Objective of financial reporting – to provide useful economic information about a business to help external parties, primarily investors and creditors, make sound financial decision in their capacity as capital providers Three out of the four assumptions that underline accounting measurement and reporting relate to the statement of financial position - Separate-entity assumption states that business transactions are separate from the transactions of the owners - Unit of measure assumption states that accounting information should be measured and reported in the national monetary unit - The continuity (going-concern) assumption states that businesses are assumed to continue to operate into the foreseeable future Basic accounting principle - Cost principle requires assets to be recorded at the historical cash-equivalent cost, which is cash paid plus the current monetary value of all non-cash considerations also given in the exchange, on the date of transaction Elements of the Classified Statement of Financial Position - Assets are economic resources controlled by an entity as a result of past transactions from which future economic benefits may be obtained - External users care about assets because they embody future benefits - Lenders use assets as forecasts about how readily the company can repay its financial obligations - For shareholders, the increase in the value of their investment will depend on the realized future benefits arising from assets under the company’s control Typically assets of a company include 1. Current assets – assets that will be used tor turned into cash, normally within one year (inventory is always considered to be a current asset, regardless of the time needed to produce and sell it) - Cash and cash equivalents - Short-term investments: reported values for shares of other companies and other financial instruments purchased as investments of excess cash - Trade and other receivables: amounts owed by customers who purchased products and services on credit - Inventories - Prepayments: reflect available benefits that the compan
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