Chapter 1 Continued
Common shares are the term used to describe the amount paid by investors for shares of ownership in a
company. Shareholders have no rights to claim to corporate resources until all creditors have been paid.
Many companies pay shareholders a return on their investment on a regular basis called dividends.
These activities involve the purchase of long-lived resources called assets. Investing generally involves
long-lived assets, such as property, plants, and equipment.
These activities create revenues and expenses. Items that are held for sale for future are called
inventory. Once the goods are sold, they are expenses (cost of goods sold).
Communicating with Users
Four main financial statements: statement of earnings, statement of retained earnings, balance sheet,
cash flow statement. Additional information is reported to the notes of the financial statements.
Statement of earnings t reports the success or failure of the company[s operations for a period of time t
annually, quarterly, or monthly. Revenues are listed before expenses. Note that cents are not reported
on financial statements. They are only used during the recording process; otherwise, accounts are
rounded to the dollar.
Statement of retained earnings t retained earnings is the cumulative earnings that have been retained
in the corporation. By monitoring the statement, the company can evaluate dividend payment practises.
Balance sheet t reports assets and claims to those assets at a specific point in time. These claims are
subdivided into claims of creditors and claims of shareholders. Assets must always balance with the sum
of liabilities and shareholders[ equity. Creditors analyze a company[s balance sheet to determine the
likelihood of being paid back. Managers use balance sheet to determine whether inventory is adequate
to support future sales, as well as relationship between liabilities and equity to determine the best ratio
of debt to equity financing.
Cash flow t provide information about the cash receipts and cash payments of a business. This helps
analyze the company[s cash position. This reports the company[s operating, financing, and investing
An accounting time period that is one year in length is called fiscal year. Financial statements that report
information for more than one period are called comparative statements.
Elements of an Annual Report
Publicly traded companies must give their shareholders an annual report each year. Both financial and
nonfinancial information is reported in this document. Financial information includes MD&A, statement
of management responsibility, auditors[ report, and financial ratios.