MOS1032 .Lecture 1 The purpose and use of financial statements.docx

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Western University
Management and Organizational Studies
Management and Organizational Studies 1021A/B

Lecture 1 The purpose and use of financial statements The Users and uses of accounting I. Users of accounting info  Internal Users – work for the company o Questions asked by internal users: a) Finance: Is there enough cash to pay bills? b) Marketing: What price should we sell ipads for to maximize profits? c) Human Resources: How many employees can we afford to hire this year? d) Production: Which product line is the most profitable?  External Users – Investors(shareholders), lenders(bankers), creditors(suppliers) o Questions asked by external users: a) Investors: IS the company earning enough to give me a return on my investment? b) Lenders & Other creditors: Will the company be able to pay its debts as they come due? o Others: employees, labour unions, customers, taxing authorities, regulatory agencies II. Ethical behavior by users  Steps used to analyze ethical situations: i. Use personal ethics/Organization’s code for ethics to identify ethical situations ii. Identify persons/groups who may be harmed or benefited (stakeholders) iii. Select the most ethical alternative, considering all the consequences Forms of business organization  Proprietorships – owned by one person  Simple to setup  Full control  The owner receives any profits, suffers, personally liable for all debts (unlimited liability)  Taxed on owner’s personal income  Limited life  Ex. Hair salons, mechanics, retail stores, farms  Partnerships – owned by more than 1 person  Written partnership agreement – formation, contribution, share of profits and losses, etc  Each partner has unlimited liability for all debts, no matter who created the debt  Taxed on each partner’s personal income tax return (same as proprie.)  Usually professional service businesses, ex: lawyers, doctors, engineers, accountants  Limited life  Corporations – separate legal entity owned by shareholders  As investors, you receive shares to indicate your ownership claim  Easier to raise capital compared with proprie/partner: a) Indefinite life: not affected by the withdrawl, death, or incapacity of an owner (differs from proprietorship/partnership) b) Ease of transferring ownership - Ppl can invest money to become shareholders c) Shareholders are not responsible for corporate debts unless personally guaranteed them(limited liability)  pay income tax as separate legal entities on any profits (differs from proprie and partner), may receive a more favourable income tax treatment  Public corporations distribute financial statements to the public Private corporations issue shares, but do not make them available to the general public/trade on public stock exchanges  “Ltd.”, “Inc.”, “Corp.” “Co.” Generally Accepted Accounting Principles for Corporations  For public corporations  International Financial Reporting Standards (IFRS) For private corporations IFRS or. Accounting standards for Private Enterprises (ASPE) Business activities  Financing activities – borrowing/paying money, issuing/repurchasing shares, paying dividends ex. An amount owed to a bank  Investing activities - the purchase/sale of long-lived assets/long-term investment securities that a company needs in order to operate i. generally involve long-lived assets ex. mining equip, computer, vehicles, buildings, land(property, plant, equipment) ii. include long-term investments only generally  Operating activities - day to day operations, include revenues and expenses i. generally involve shorter-lived assets ex. A/R, supplies , inventory, payables The content and purpose of financial statements   Income Statement - revenues and expenses (show how a company performed during a period of time) o Revenue - Expenses = profit/net loose before income tax - income tax expense = net income/ lose o Amounts received from issuing shares --> not revenues! Amounts paid out as dividends --> not expenses! o Who are interested? 1) Investors - continue to invest 2) Lenders - continue to lend o Decision toolkit: Are the company's operations profitable? --> Income Statement --> Indicates the success/failure of the company's operating activities by reporting its revenues & expenses --> If the company's revenues exceed its expenses, it will report a profit; otherwise it will report a loss  Statement of changes in equity - changes in each component of shareholders' equity, total equity, during a period of time o Shareholders' equity: the ownership interest in a company a. share capital - amounts contributed by shareholders in exchange for shares of ownership (
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