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MGT120H5 (65)
Chapter 1

Lecture 2 - chapter 1.docx

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University of Toronto Mississauga
Catherine Seguin

Lecture 2 : chapter 1 Jan 14, 2014 The Financial Statements Objective 1: Financial statements = product of accounting • Are business docs that companies use to report results of their activities to various users. Produces following: income statement, statement of changes in equity, balance sheet and statement of cash flow Accounting = language of business • Is the info system that measures business activities, processes data into reports and communicates results to decision makers Flow ofAccounting Information • People make decisions  business trasactions occur  business prepare reports to show results of their operations Users ofAccounting Info • Individuals, businesses, investors & creditors, gov regulatory agencies, taxing authorities, non profit org FinancialAccounting • Internal users , external decision makers • Info MUST be presented in systematic reports & meet GAAP standards for relevance and reliability ManagementAccounting • Financial and operating data about firm’s activities, processes, operating units products, services and customers • Internal decision makers • Info: can be generated thru assumptions, future oriented, not governed by GAAP Organize a business : proprietorship, partnership, corporation Public corporation – shares are sold on the stock exchange (e.g. IBM, Dell, HP, etc) Private corporation – shares are privately held (accounting information not released to public) Corporation: stocks  shareholders  chief operating officers, presidents, managers Objective 2: Apply the accounting equation to business organizations Assets = liabilities + shareholder’s / owner’s equity • Assets: economic resources of a business that are expected to produce future benefits (e.g. cash, office supplies, inventory, furniture, buildings and land) • Liabilities: economic claims or debts payable to outsiders called creditors (e.g. accounts payable, notes payable, salary payable, interest payable, etc) • Shareholder’s equity: owner’s interests in assets of a corp. two main categories are: o Contributed capital : amounts invested by owners in the form of shares  Includes owners, shareholders and investors – provide financing o Retained earnings: amounts earned by profitable operations and kept in business. Components include revenue, expenses and dividends  add revenue minus expenses = profit (accumulated over the years) minus dividends Net Income: • Revenue = increase in retained earnings from delivering g/s to customers • Expenses = decreases in retained earnings that result from operations Objective 3: understanding financial statements and how to use them Financial Statements: represent company in financial terms  each one related to specific date or covers a particular period. They include : income statement, statement of changes in equity, balance sheet, cash flow statement Objective 4: explain the relationships among the financial statements Relationship among financial statements Lecture 2 : chapter 1 Jan 14, 2014 Income statement – net income  statement of changes in equity – changes in shares and retained earnings  balance sheet – report shares and retained earnings  cash flow statement – rep
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