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Financial Accounting
Douglas Kong

Chapter 1 What is accounting? A system that collects and processes (analyzes, measures, and records) financial information about an organization and reports that information to decision makers. Investors – Individuals who buy small percentages of large corporations and hope to gain in two ways. 1) They hope to receive a portion of what the company earns in cash payments called dividends and 2) they hope they can sell their share of the company at a higher price than they paid Managerial or management accounting – developing accounting information for internal managers or decision makers in order for them to plan and operate the day to day business operations. Eg: marketing/finance/HR directors Financial accounting – this is developing accounting information for external decision makers such as creditors, investors, customers, suppliers, etc and this is the focus of our textbook. Statement of financial position Purpose – to report the financial position of an entity at a particular point in time Structure – Company name, statement type, date of statement, unit of measure (millions) Patent is considered an asset This statement is important because the assets helps external decision makers to judge whether the company has sufficient resources to operate the business and also if the business could be sold for cash if it goes out of business. Liabilities show if a company has sufficient cash to pay off its debts. Banks will look at this when giving loans. Shareholder’s equity is important because the creditors repayments must be settled before paying the owners. Shareholder’s equity Consists of 3 things. Share capital: the investment of cash and other assets in the business by the owners in exchange for shares; Retained earnings: amount of earnings reinvested in the business; Other components: reflect the changes in assets and liabilities over time Statement of Comprehensive income – reports the change in shareholder’s equity, during a period, from business activities other than investments by shareholders or distributions to shareholders. It does not include investment by owners or distributions to owners. Format: Revenue – Expenses = Profit + Other comprehensive income = Comprehensive income Income statement Costs of sales (aka cost of goods sold) is the total cost to produce the products sold to customers during the period. External decision makers want to look at a firm’s profit to see if they are capable of selling goods and services for more than they cost to produce and deliver. Statement of Changes in Equity This statement focuses on the distribution of profit and other changes to shareholder’s equity that affects the company’s financial position Date should be written as it would be written in the income statement (for the month ended..) Creditors closely monitor a firm’s retained earnings because the firm’s policy on dividend payments affects its ability to repay its debts Retained earnings = Beginning retained earnings + Profit – Dividends
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