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Chapter 1

AFM101 Chapter Notes - Chapter 1: Financial Statement, Income Statement, Retained Earnings


Department
Accounting & Financial Management
Course Code
AFM101
Professor
Duane Kennedy
Chapter
1

Page:
of 6
Managerial
Accounting system
Internal Decision makers
(Managers)
Provide information for:
External Decision
makers
Creditors Investors Suppliers Customers
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.
-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
been paid for.
-Expenses are the monetary resources the entity used up to produce revenue.
Cost of goods sold, cost of building, tools used.
-Profit is the excess of total revenues over total expenses used to generate revenue
during a specific period.
-Investors and creditors tend to closely examine a firm’s profit because it indicates the
firms ability to sell goods for more than they cost to produce.
-Some examples of content are: sales revenue, cost of sales, selling expense,
(revenue – expenses = profit (net gain or loss))