Textbook Notes

9 Pages

Business Administration
Course Code
Business Administration 2257
Jason Dean

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CHAPTER 1 – FINANCIAL STATEMENTS AND BUSINESS DECISIONS VINCOR INTERNATIONAL INC. Things to know… 1. What categories of items/elements are reported on each of the four statements? (What type of information does a statement convey, and where can you find it?) 2. How are the elements within a statement related? These relationships are usually described by an equation that tells you how the elements forget together. 3. Why is each element important to managers’, owners’, or creditors’ decisions? • Four basic financial statements: 1. Balance sheet 2. Income statement 3. Statement of retained earnings 4. Cash flow statement • Can have yearly, quarterly, or monthly reports, though most companies do yearly and quarterly. Balance Sheet • Purpose: To report the financial position (amount of assets, liabilities, and shareholders’ equity) of an accounting entity at a particular point in time. • Heading structure: • Name of the entity - Vincor International Inc. • Title of the statement - Balance Sheet • Specific date of the statement - At March 31, 2005 • Unit of measure – (in thousands of dollars) Heading looks like… VINCOR INTERNATIONAL INC. Balance Sheet At March 31, 2005 (in thousands of dollars) • Balance sheet = financial snapshot, indicates entity’s financial position at a specific point in time. • BASIC ACCOUNTING EQUATION/BALANCE SHEET EQUATION: o Assets = Liabilities + Shareholder’s Equity • Financial position: the economic resources that a company owns and the sources of financing for those resources. • Elements: o Assets • Cash • Accounts receivable • Inventories • Prepaid expenses • Intangible assets (i.e. patents, trademarks, franchises). o Liabilities • Bank indebtedness • Accounts payable • Income taxes payable • Long-term debt • Future income taxes o Shareholders’ equity (amount of financing provided by business owners and earnings). • Share capital (investment in the business by the owners). • Retained earnings (amount of earnings reinvested in the business). • Assets are listed by ease of conversion into cash. • Liabilities are listed by their maturity/due date. Income Statement • Reports the accountant’s primary measure of performance of a business. • Reports information for a period of time, not a specific date, called an accounting period. Heading looks like… VINCOR INTERNATIONAL INC. Income Statement For the Year Ended March 31, 2005 (in thousands of dollars) • Revenues – Expenses = Net Income • Elements o Revenues • Sales revenues o Expenses • Cost of goods sold • Selling expenses • Administrative expenses • Interest expense • Income tax expense o Net income (net earnings, profit, bottom line – can also be net loss). Statement of Retained Earnings Heading looks like… VINCOR INTERNATIONAL INC. Statement of Retained Earnings For the Year Ended March 31, 2005 (in thousands of dollars) • Reports the way that net income and the distribution of dividends affected the company’s financial position during the accounting period. • Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings The Cash Flow Statement Heading looks like… VINCOR INTERNATIONAL INC. Cash Flow Statement For the Year Ended March 31, 2005 (in thousands of dollars) • Reports inflows and outflows of cash. +/- Cash Flows from Operating Activities +/- Cash Flows from Investing Activities +/- Cash Flows from Financing Activities Change in Cash • Elements o Cash flows from operating activities • Directly related to earning income. • Ex: Cash made when retailers pay for the wine. o Cash flows from investing activities • Related to the acquisition or sale of the company’s productive assets. • Ex: buying plant and equipment. o Cash flows from financing activities: • Related to financing of company itself. • Ex: Involves receipts and payments of cash to investors and creditors. Relationships Among the Four Statements 1. Net income from the income statement results in an increase in ending retained earnings on the statement of retained earnings. 2. Ending retained earnings from the statement of retained earnings is one of the two components of shareholders’ equity on the balance 3. The change in cash on the cash flow statement added to the cash balance at the beginning of the year equals the balance of cash at the end of year, which appears on the balance sheet. Determining Vincor’s Value • Method 1: price/earnings ratio (P/E ratio) o Measures the multiple of the current year’s earnings that investors are willing to pay for the company’s shares. o High P/E means investors have confidence the company will produce higher profits in future. If other companies P/E ratio was 21 (selling for 21 times their current year’s earnings), then the price Constellation paid for Vincor could be evaluated like this… P/E ratio = Market Price Net Income Market (Purchase) Price = P/E Ratio x Net Income = 21 x Net Income = 21 x $48,689,000 = $1,022,469,000 However, Constellation paid more than that ($1.58 billion). This is because they wanted to acquire special assets valuable to them (global presence, to become largest wine company in world). • Never use accounting information without understanding the measurement rules used to develop the information. • Measurement rules are based on GAAP (generally accepted accounting principles. • Consequences of releasing statements on companies: 1. Effects on the selling price of a company’s shares. 2. Effects on the amount of bonuses received by management and employees. 3. Loss of competitive advantage over other companies. • Three steps to ensure accuracy of records: 1. System of controls 2. External auditors 3. Board of directors • Three types of accountants in Canada: 1. Chartered Accountant (CA) 2. Certified General Accountant (CGA) 3. Certified Management Accountant (CMA) Three Main Business Entities • Sole Proprietorship o Unincorporated o Owned by one person o Usually small, common in service, retailing, and farming o Owner is often manager o Legally, business and owner are one o Accounting views business as separate from owner • Partnership o Unincorporated o Owned by 2+ o Partnership contracts o Not legally separate from owners o Each general partner has unlimited liability o Accounting-wise, business and partners are separate • Corporation o Owners = shareholders/stockholders o Shares can usually be bought and sold freely o Shareholders have limited liability, liable for company’s debts only to the extent of their investments o Shareholders elect g
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