Chapter 1 Notes

6 Pages

Accounting & Financial Management
Course Code
AFM 101
Duane Kennedy

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AFM 101 – Chapter #1 notes - Creditors (lenders) : one to which money is owed - Investors: individuals who buy small percentages of large corporations, they do this for two reasons: in order to receive a portion of the company earns (dividends), and to sell back the stocks they bought, at a higher price - To understand a businesses’ financial statements one must first look at its operations - Nestle buys raw materials such as milk and cereals from suppliers, then after producing its products distributes them to the world, those who buy the products are customers - 1. purchase ingredients and labour 2. Produce products 3. Sell products 4. collect income - There are internal & external decision makers. Internal decision makers are the managers of nestle, and external decision makers are parties outside the company (investors) - External parties and decision makers are the one who make use of the company’s Accounting System, using the reports produced to make financial decisions (to buy stock for example or to not buy). This is called Financial Accounting. - Managerial Accounting is the use of financial info for the benefit of the managers of the company, this info tends to be much more detailed due to the fact that they are in charge of the day to day operations of the company. Managerial Accounting system Internal Decision makers (Managers) Provide information for: External Decision makers Creditors Investors Suppliers Customers - We focus on how to primary users of financial statements: investors (owners) and creditors (lenders) rely on the company’s four financial statements to aid their decisions. - The Basic Financial Statements are: statement of financial position, statement of comprehensive income, statement of changes in equity, statement of cash flows. - These 4 statements are intended primarily to inform investors, creditors and other external decision makers. - These basically summarize the financial activities of the company and can be prepared at any time for any period of time. - Nestle in particular prepares quarterly reports and annual reports for its investors Statement of Financial Position - The purpose of the Statement of Financial position is to report the financial position (assets, liabilities, and shareholders equities’) of a company at any point in time. It is a clear snapshot of the financial position of a company at specific time. - There are 4 significant items related to the statement: 1. name of the entity (Nestle), 2. Title of the statement (statement of financial position) 3. specific date of statement (At December 31, 2009) 4. Unit of measure (In millions of Swiss francs) - An Accounting Entity is: is the organization for which financial data are to be collected and reported. - Nestle first lists the assets, which are economic resources legally controlled by the entity, then it lists liabilities and shareholders equity. Liabilities are claims against the company’s economic resources (debt, money owed to creditors) - Financing provided by creditors creates a liability, while financing provided by the owners creates owners’ equity. - ASSETS = LIABILITIES + SHAREHOLDERS EQUITY - Assets are economic resources gained as a result of past business events from which future economic benefits can be gained. Assets include (land, cash, plant and equipment, accounts receivables. - There are also assets called Intangible Assets, assets such as: brands, trademarks, investments in other companies, intellectual property rights. They are called this way because they don’t exist physically. - Liabilities: are the company’s legal obligations that result from past business events. They come from the purchase of raw goods or services to finance the business. Because they are usually made on credit (because its huge amounts of money) this often results in Accounts payables (trade payables) - Short-term borrowings represent amounts burrowed from banks or other creditors, and to be paid in the near future - Income taxes payables represent an amount owed to the government in income taxes as a result of profitable operations - Accrued liabilities are amounts owed to suppliers for services such as rent and utilities. - Long-term borrowings result from borrowings based on formal written debt with institutions such as banks - Shareholder’s Equity indicates the amount of financing provided by owners of shares in the business as well as earnings over time. It arises from 3 sources: Share Capital – investment of cash or other assets on business in exchange for shares. Retained Earnings – amount of earnings re-invested in the business. Other Components – reflect changes in the value of assets and liabilities over time. - Note: Most companies list their assets in ascending or descending order of Liquidity. - A single underline is used after the last item in a group, before a subtotal. And a DOUBLE underline is placed below group totals - Some examples of Content are: cash, trade receivables, plant and equipment, share capital. (Assets = Liabilities + Shareholders Equity) Statement of Comprehensive Income - Reports the profit made during the accounting period from business activities. - It (statement of comprehensive) is composed of 2 parts: the first reports the Profit ( Profit = Revenues – Expenses), the second part reports other comprehensive income which are made up of income and expense items that are not recognized in the income statement. - In an Income statement, revenues are first, then expenses, then profit. - Unlike a statement of financial position (Balance sheet), the income statement reports information for a specified period of time called the Accounting period. Where as the statement of financial position states the information as of a certain date. - Companies earn Revenues from the sale of goods and services. They are reported on the income statement after being sold to customers whether or not they have
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