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RSM100Y1 (431)
Chapter 15

Chapter 15 - Accounting.docx
Chapter 15 - Accounting.docx

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School
University of Toronto St. George
Department
Rotman Commerce
Course
RSM100Y1
Professor
Michael Khan
Semester
Winter

Description
Chapter 15 The Income statement - Income statement: A financial record of a company’s revenues, expenses and profits over a specific period of time - Summarizes a firm’s financial performance over a specific time period, usually a quarter (three months) of a year - Helps decision makers focus on overall revenues and the costs needed to generate these revenues - Not-for-profit organization use the income statement to check whether the revenues from contributions and other sources will cover the organization’s operating costs - Provides many basic data to calculate the financial ratios that managers use in planning and controlling activities - Also called a profit-and-loss statement, P&L statement, statement of comprehensive income (under IFRS) - Begins with total sales or revenues generated during a year, quarter, or month, then deduct all of the costs related to producing the revenues (operating expenses, interest, and taxes), the remaining net income may be distributed to the firm’s owners (the shareholders, proprietors, or partners) or reinvested in the company as retained earnings - Bottom-line: The final figure on the income statement – net income after taxes - Keeping costs under control is important part of running a business Statement of Changes in Equity - Statement of changes in equity: a record of the change in equity from the end of one fiscal period to the end of the next fiscal period - Uses information form both the balance sheet and the income statement - Begins with the shareholders’ equity shown on balance sheet at the end of prior year, then net income is added, and cash dividends paid to owners are subtracted - Additional capital added to equity, withdrew capital, equity is reduced - All additions and subtractions equal the change in owners’ equity from the end of the previous fiscal year to the end of the current fiscal year - New amount of owners’ equity is reported on the balance sheet for the current year The Statement of cash flows - Statement of cash flows: a record of the sources and uses of cash during a period of time, provides investors and creditors with information about a firm’s cash receipts and cash payments for its operations, investments, and financing during an accounting period - Accrual accounting: an accounting method that records revenues and expenses when they occur, not when cash actually changes hand, companies prepare a statement of cash flows due to the wide use of this method - The amounts may differ between what is reported as sales, expenses, and profits and the amount of cash that actually flows into and out of a business during a period of time - Can help to prevent financial distress for otherwise profitable firms - Can provide investors and others with vital information Financial ratio analysis - Accounting professionals also help managers interpret the statements by comparing data on the firm’s current activities to data for previous periods and to data on other companies in the same industry - Ratio analysis: measures a firm’s liquidity, profitability, reliance on debt financing, and how effectively management uses the firm’s resources, allows comparisons with other firms and with the firm’s own past performance - Ratio interpret actual performance and making comparisons to what should have happened - Managers compare their firm’s ratios with ratios similar companies to understand their firm’s performance compared with competitors’ result - These industry standards are important measures and help focus on problem area – and areas of excellence - Ratios for the current accounting period can be compared with similar calculations for previous periods to spot developing trends - Can be classified according to specific purposes Liquidity ratios - Liquidity ratios: measures a firm’s ability to meet its short-term obligations, such as loans, when they are due - An increase in liquidity reduces the likelihood that a firm will need to raise funds to repay loans - Firms with low liquidity may have to choose between defaulting (failing to pay) and borrowing fro high-cost lending sources to meet short term financial obligations - Current ratio: Current assets/Current liabilities  Compares current assets to current liabilities  Provides information about the firm’s ability to pay its current debts as they mature, or as payments are due  Must be considered along with factors such as nature of the business, the season, and the quality of the company’s management team - Acid-test ratio
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