MGTB05 Chapter 2 Notes

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University of Toronto Scarborough
Financial Accounting
Daga Sandra

MGTB05 Financial Accounting I Chapter 2—Investing and Financing Decisions and the Statement of Financial Position Understanding the Business  financial statements include four components: the statement of financial position, the statement of comprehensive income, the statement of changes in equity and the statement of cash flows  investing activities are typical asset acquisition activities whereas financing activities involve borrowing funds from creditors and receiving funds from investors to acquire the assets Overview of Accounting Concepts Concepts Emphasized in Chapter 2  the primary objective of external financial reporting is to provide useful economic information about a business to help external parties (investors and creditors) make sound financial decisions (in their capacity as capital providers)  decision makers are the users of accounting information  financial reports must enable decision makers not only to assess the amounts, timing and uncertainty of future cash inflows and outflows but also to understand the financial value of both the assets owned and claims against those assets (liabilities and equity)  users are most interested in information to assist them in projecting the future cash inflows and outflows of a business (creditors-ability of entity to pay interest and pay principle, investors-entity’s ability to pay dividends and possible rise in share price in the future)  separate-entity assumption: the activities of each business must be accounted for as an individual organization that is separate and apart from its owners, all other persons and other entities  unit-of-measure assumption: each business entity accounts for and reports its financial results primarily in terms of the national monetary unit even if the entity has business operations in many countries  accountants assume that the unit of measure has a stable value over time because it allows for comparisons and combinations of different amounts thought the purchasing power of the unit has changed over time  continuity (going-concern) assumption: a business if normally assumed to continue operating in the foreseeable future (to meet its contractual commitments); if not the assets and liabilities will be reported at liquidation value  cost principle: requires assets to be recorded at the historical cash-equivalent cost (actual cost), which is cash paid, plus the current monetary value of all non-cash considerations (any assets, privileges or rights) also given in the exchange, on the date of the transaction  after the date of acquisition, the recorded value remains unchanged at its original cost irrespective of market value because market value is not verifiable or reliable and as long as an entity is a going concern it is unlikely to sell its assets at market value Elements of the Classified Statement of Financial Position  assets are economic resources controlled by an entity as a result of past transactions or events and from which future economic benefits may be obtained  for lenders assets show how readily a company can pay its financial obligations  for shareholders, the increase in the value of their investment will depend on the realized future benefits arising from assets  the assets of a company:  current assets (cash and cash equivalents, short-term investments, trade and other receivables, inventories, prepayments of expenses paid in advance of use and other current assets)  non-current or long-term assets (property, plant and equipment (at cost less accumulated depreciation), investment in associates, financial assets, goodwill, intangible assets, and other miscellaneous assets)  current-assets or short-term assets are short-term economic resources that an entity will typically transform into cash or use within the next year or the operating business cycle, listed in order of liquidity (how soon they can be transformed into cash)  notes receivables are written promises by customers and others to pay an entity fixed amounts by specific dates  non-current or long-term assets are considered long-term because they will be used or turned into cash over a period longer than the next year  goodwill is an intangible asset that arises when a company purchases another business to control that businesses’ operating, investment and financing decisions  liabilities are a corporation’s debts and obligations of an entity arising from past transactions, which will be paid with assets or services; represent future outflows of cash or services to the creditors that provided the corporation with the resources to conduct its business  the liabilities of a company:  current liabilities (trade payables, short-term borrowings, income taxes payable, accrued liabilities, other current liabilities)  non-current or long-term liabilities (long-term borrowings, deferred income tax liabilities, provisions, other liabilities)  liabilities are listed in order of maturity or how soon an obligation must be paid  current liabilities or short-term liabilities are obligations that will be paid within the next year or operating business cycle of the company  accrued liabilities represents the total amount owed to suppliers for various types of services such as payroll, rent, and other obligations  non-current or long-term liabilities are a company’s debts that have maturities extending beyond one year from the date of the statement of financial position  deferred income tax liabilities arise from temporary differences between the profit measured according to IRFS and taxable profit that is determined in conformity with applicable tax laws  provisions are estimated liabilities characterized by uncertainty about the exact amount to be paid and the timing of the payment  shareholders’ equity, owners’ equity or stockholders’ equity is the financing provided to the corporation by both its owners and the operations of the business  owners have a residual claim on a corporation’s assets whereas creditors are entitled to settlement of their legal claims on the corporation’s assets before the owners  owners invest because they expect to receive dividends and gains from selling their shares for more than they paid for purchasing them  shareholders’ equity  share capital (capital stock)—results from the owners providing cash and other assets to the business  contributed surplus: when shareholders contribute in excess of the amount allocated to sha
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