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Canada (161,858)
MGAB01H3 (126)
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Chapter

Accounting notes

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Department
Financial Accounting
Course
MGAB01H3
Professor
Daga
Semester
Fall

Description
1 Financial Statements and Business Decisions The Statement of Comprehensive Income Assets Economic resources Liabilities Sources of financing for the economic resources from creditors. Shareholders Equity Sources of financing for the economic resources from shareholders. Creditors Lenders Investors Individuals who buy small percentages of large corporations. Dividents Portion of what the company earns which is given to investors. Financing activities When money is exchanged between lenders and owners of a firm. Investing activities When a firm buys or sells property. Cash flows from operating activities Cash flows that are directly related to earning income. Cash flow from investing activities Cash flows related to the acquisition or sale of the companys productive assets. Cash flow from financing activities - Cash flows related to the financing of the company itself. They involve both receipts and payments of cash to investors and creditors. Share capital Investment of cash and other assets in the business by owners in exchange for shares. Retained earnings Amount of earnings reinvested in the business (and thus not distributed to shareholders in the form of dividends). Other components Reflects the changes in the values of assets and liabilities over time. Interpreting Assets and Liabilities and Shareholders equity on the statement of financial position: Assets Important to owners and creditors as it shows whether the company has sufficient resources to operate the business, and it is also important to creditors because they could be sold for cash in case the firm goes out of business. Liabilities Creditors look at this to determine whether or not the firm has sufficient resources of cash to pay its debt obligations. Shareholders equity Legally, if a company goes out of business, the firm must sell its assets and pay back the creditors, then the shareholders. Therefore, shareholders equity serves as a protective cushion to creditors as shareholders provide resources for the company to use in future, with no promise of receiving any money. NOTES ON FORMAT FOR STATEMENT OF FINANCIAL POSITION/BALANCE SHEET - Assets are listed either increasing or decreasing in their convertibility to cash. - Dollar sign beside the first amount in a group of items (assets, liabilities, shareholders equity) - A single underline is placed under the last item in a group, and a double line under the total (total assets). The Statement of Comprehensive Income Revenue Income from goods sold (quantity times price) and is normally recorded on the income statement whether customers have paid for it or not. Expenses Value of resources the entity used up to earn revenues during a period. Cost of sales/Cost of goods sold Total cost to produce the goods for sale. This includes cost of ingredients, wages paid to factory workers, and even a portion of the cost of buildings, equipment, and tools used (called depreciation). Interest expense Reflects the cost of using borrowed funds. Profit Excess of total revenues over total expenses incurred to generate revenue during a specific period. Losses are normally noted by parenthesis around the reported figure. Note: Profit normally does not equal the net cash generated by operations. Analyzing The Income Statement: Investors and creditors want to monitor a firm to see their ability to sell goods and services for more than it costs to produce and deliver them. Investors buy shares when they believe that future earnings will lead to higher share price. Lenders also rely on future earnings to provide resources to repay loans. The Statement of Changes in Equity Beginning retained earnings + profit Dividends = Ending retained earnings Interpreting Retained Earnings Creditors watch a firms retained earnings because the firms policy on dividend payments to its shareholders affects its ability to repay its debts. Investors also look at debt as every payment to debt means theres less to give as dividends. Investors also examine retained earnings to determine whether the company is reinvesting a sufficient portion of profit to support future growth. The Statement of Cash Flows +/- Cash flows from operating activities +/- Cash flows from investing activities +/- Cash flows from financing activities Change in cash Cash flows from operating activities Cash flows that are directly related to earning income. For example when revenue is received and expenses. Cash flows from investing activities Cash flows related to the acquisition or sale of the companys productive assets. (Money that leaves from buying assets and money received from selling assets). Cash flows from financing activities Directly related to the financing of the company itself. They involve both receipts and payments of cash to investors and creditors. Interpreting the Statement of Cash Flows: The statement can serve to predict future cash flows that may be available for payment of debt to creditors and dividends to investors. Cash flows from operating activities can be used to look at how the company generates more cash from operations than it uses, and its ability to generate cash to meet its current cash needs and to repay debts or expand the company. Cash flow from investing activities shows any significant purchases the company has made, like a new manufacturing capacity which is a good sign if demand continues to increase. Cash flows from financing activities indicates that the firm was abl to pay dividends to shareholders and repay part of its short-term debt and long-term borrowings because it generated cash from operating activities.
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