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Canada (161,695)
Management (848)
MGT120H5 (67)
Chapter 1

Chapter 1 short summary/ first lecture notes.doc

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Dave Swanston

Chapter 1: The Financial Statements Learning Objective 1: Learn that financial statements are the product of accounting Accounting – The Language of Business  Accounting is the information system that measures business activities, processes data into reports, and communicates results to decision makers Financial statements: the business documents that companies use to report the results of their activities to various user groups. The system of accounting produces the following statements: 1. Income statement (Revenues – Expenses = net income) 2. Statement of changes in equity 3. Balance sheet/Statement of financial position (Assets= Liabilities + Owners’ equity) 4. Statement of cash flow(operating, financing, investing) The Flow of Accounting Information 1. People make decisions 2. Business transactions occur 3. Businesses prepare reports to show the results of their operations. Who Uses Accounting Information? 1. Individuals • Have a background research of the companies before doing personal decision 2. Businesses • Competition between companies 3. Investors and creditors • Primary users 4. Government regulatory agencies • Public corporations report to the investing public 5. Taxing authorities • Corporation pays tax as well, so they need to know if the corporation is paying the right amount of taxes 6. Non-profit organizations • Provides service, so they need enough revenue to support the expenses Financial Accounting: Summarize business transactions of business entity for a specified period Users  Internal  External decision makers  Users have assurance on the information Information must:  Be presented in systematic reports  Meet GAAP (Generally accepted accounting principles) standards for relevance and reliability Management Accounting: Financial and operating data about an organization’s activities, processes, operating units products services and customers Users  Internal decision makers  Ex: What is the cost to organ transplants in a hospital? (information not given to the public) Information  Can be generated using assumptions  Future oriented  Not governed by GAAP How to Organize a Business 1. Proprietorships • Single owner 2. Partnerships • Two or more owners, called partner 3. Corporations • Public corporation: Shares are sold on the stock exchange - Ex: IBM, Dell, HP, Canadian tire, Apple • Private corporation: shares are privately held - More private corporation, but smaller than public corporation Learning Objective 2: Apply the accounting equation to business organizations The Accounting Equation Assets = Liabilities and Shareholders’ Equity What I own = Who supplied the resources (Creditors and Owners) Assets - economic resources of a business that are expected to produce future benefits. Help generate revenue • Ex: Cash, office supplies (computers, pens, paper, etc.), inventory (food, buns and wieners), furniture (equipment), buildings and land Liabilities - economic claims or debts payable to outsiders called creditors • Ex: accounts payable(money owed to others), notes payable (formal agreement between lender and borrower, with interest rate), salary payable(owed wages), interest payable (not the same with interest expense), etc. Shareholders’ equity – owners’ interests in the assets of a corporation. Two main categories are: 1. Contributed capital - amounts invested by owners in the form of shares • Receive common share in return 2. Retained earnings - amounts earned by profitable operations and kept in the business. Components include revenue, expenses and dividends A = L + OE 1. Contributed capital o Investment 2. Retained earnings o + Revenue – Expenses(accumulated over the years) - Dividend Net income:  Revenues – increases in retained earnings from delivering goods or services to customers.  Expenses - decreases in retained earnings that result from operations Components of Retained Earnings Learning Objective 3: Understanding financial statements and how to use them Financial Statements They represent the company in financial terms. Each one relates to a specific date or covers a particular period. They include: 1. Income statement (Revenues – Expenses = net income) 2. Statement of changes in equity 3. Balance sheet (Assets= Liabilities + Owners’ equity) 4. Statement of cash flow Falk Consulting Inc. Income Statement For the Month Ended May 31, 2010 Revenue: Service revenue $10,950 Expenses: Rent expense $1,500 Salary expense 1,400 Utilities expense __500 Total expenses 3,400 Net income $7,550 Falk Consulting Inc. Statement of Retained Earnings (was used for a public co.; still used for a private co.) for the month ending May 31, 2010 Retained earnings, May 1, 2010 $ 0 Add: Ne
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