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Chapter 6-8, 13

MGAB01H3 Chapter Notes - Chapter 6-8, 13: Current Asset, Current Liability, Financial Statement

Financial Accounting
Course Code
Liang Chen
6-8, 13

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Financial Statements:
SOFP: (balance sheet) report assets/liab/se of an acc entity @ spec. time (A= L+SE)
SOCI: change in SE during period excluding shareholders(can be SO earnings + SOCI or just SOCI)
Revenue – expenses = net earnings
SOCE: all changes in SE during period (Beg RE + NE – Div = End RE)
SOCF: $ in/out flows related to operating, investing, financing activities during per. (CFO+CFI+CFF=
NE from SOEarnings increases ending RE in SOCE
End RE from SOCE is part of SE in SOFP
in $ on SOCF + beg $ balance = end $ bal on SOFP
Intnl Fncl Rprtg Stndrds: IFRS are guidelines for measurement rules used to dvlp info in fncl stmts
Helps cmpnys choose best acc methods for their specific operations and financial situation
Prvnts mngrs from manipulating values for personal interest by using non-conforming acc pratices
Users familiarize with one set of practices, thus can understand/assess financial statements properly
Sole proprietorship: unincorp. Business owned by 1 person; retail/farming type; owner=mngr
Partnership: unincorp. Bus. Own by 2+ ppl; each partner has unlim. Liab (each partner resp. for bus. Debts)
Corporation: incorp fdrly, owners=shrhldrs; rep by shrs of cap owned; lmtd liab (cant lose more than paid 4 shrs)
PE Ratio = Price/NI
Objective of ext fincl reprtng: help ext parties make sound fncl dcsns
GAAPs: generally accepted accounting principles are characteristics/constraints/assumptions/principles
2 Fund qual charac: Relevance: if influences users’ decisions; has predictive/confirmatory val
Faithful rep: must reflect substance of underlying transactions, which may differ from legal form
4 enhancing: Comparability: when similar acc methods applied
Verifiability: if indep accs can agree on nature/amt of transaction
Timeliness: avail in time so future values can be predicted and past values can be confirmed
Understandability: allows users to comprehend; it’s clear and concise & presentable
Cost constraint: info produced only if ben of increased decision usefulness > expected costs of providing
Materiality (prudence) Constraint: how relevant info is
Assumptions: Separate entity, Unit of measure, Continuity (going concern), Periodicity (reporting in short periods)
Principles: Historical Cost, Revenue Recognition, Full Disclosure, Matching
ADE (debited to show increase/credited to show decrease) ASSETS, DIVIDENDS, EXPENSES
CLR (credited to show increase/debited to show decrease) CAPITAL, LIABILITIES, REVENUE
Current ratio:
Current Assets ÷ Current Liabilities
Indicator of ability to pay off current liabilities
Higher the ratio, more cushion for company to pay off current obligations; good liquidity
Too high ratio means inefficient use of resources
May be misleading measure of liquidity if sig funds tied up in assets that aren’t easily converted to $
Decision makers require periodic info about financial condition
To measure net earnings for specific time, follow periodicity assumption:
Long life of a company can be reported in shorter time periods (months, quarters, years)
Cash basis accounting: records revenues when cash received and expense when cash paid
Local retailers and small businesses use this type bc no need to report to external users
Accrual accounting: revenues and expenses recognized when earned/incurred
Revenue principle: revenue recognized when risks transferred to customer
Matching process: expenses be recorded when incurred in earning revenue
Earnings per share: helps eval operating performance/profitability
Total asset turnover ratio & Return on assets
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Adjusting entries made at end of accounting period bc very costly and time consuming; req every time financial
statements for external users is made
Deferred revenue: prev recorded liab that need to be adj to reflect revenue earned (eg. Def Ticket/subscription rev)
Accrued rev: prev unrecord rev tht need to be rec to reflect amount earned (eg. Interest/rent receivable)
Def exp: prev acq assets, adj to reflect expense incurred in using them (eg. Supplies, rent insurance, equipment)
Accrued exp: unrec exp, adj to reflect amount incurred and its related payable acc (eg. Interest/wages/taxes payable)
Materiality: minor items that wouldn’t influence decisions of external users can be treated in simplest manner
Pens/pencils bought for office use by company can be just an expense, rather than depreciating them as
assets since they cost so little and are of no real importance
Net profit margin ratio and return on equity
Closing entries transfer balances in temporary accounts to RE and establish 0 balance for next period
Special summary acc called :income summary, close rev/gain/exp/loss acc in journal format
Regulators: CSA, AcSB, AASB, Stock Exchanges
Regulate standards
Managers: CEO, CFO, acctg staff
Sign statement of responsibility alongside annual reports released to ensure everything correct
Disclose auditors and committee, and any weaknesses or fraud involving company
Acctg staff have professional responsibility of accuracy when making
Board of Directors: audit committee
Elected by shareholders to rep their interests; ensures integrity with company’s financial reports
Independent accountants declare clean audit opinion to prove all reports are in conformity with standards
Info intermediaries: analysts and information services
Users: Institutional and Private Investors, Creditors and others
Disclosure processes include press releases, annual reports, and quarterly reports
MD&A: mgmt. discussion and analysis; imp section bc discusses non financial and strategic info
Constraints of Accounting Measurement:
Cost: info only produced if benefits are greater than costs of producing it
Prudence: make sure nothing is overstated or understated with respect to revenue and expenses
Revenues recorded when: entity transfers significant risks/rewards of ownership, entity retains neither continuing
managerial involvement nor control over goods sold, revenue can be measured reliably, probable that economic
benefits of transaction will flow to entity, and costs can be measured reliably
Point at which ownership changes hands is determined by shipping terms in sales contract
When goods shipped FOB (free on board) shipping point, title changes hands at shipment so buyer pays for shipping
Revenues recognized at shipment
When shipped FOB destination point, title changes hands on delivery, so seller pays for shipping
Revenues recognized at delivery
Credits card discount: fee charged by credit card company for its services
Sales Rev XXX
Less: Credit card discounts (.03 x $XXX) XX
Net Sales (reported on SOE) XXX
Sales discount encourages prompt payment of a trade account receivable ; 2/10, n/30 = 2% off if pay in 10 days,
otherwise pay in 30 days full amount
Sales Rev 1000
Less: Sales discounts (.02 x $1000) 20
Net sales 980
(Amount Saved / Amount Paid) = Interest rate for 20 days (bc ur paying in 10 days so u have 20 days left)
($2 / $98) = 2.04% for 20 days aka 0.102% per day
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