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Management and Organizational Studies 1023A/B Chapter Notes -Honda Nsx, Underwriting, Commodity Futures Trading Commission


Department
Management and Organizational Studies
Course Code
MOS 1023A/B
Professor
Maria Ferraro

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Chapter 1: The Purpose and Use of Financial Statements
Accounting Matters
Accounting is the information system that identifies and records the economic
events of an organization, and then communicates them to a wide variety of interest
users.
Marketing offers a good example of how having an understanding of the basics of
accounting; marketing managers must also be able to decide on pricing strategies
based on costs.
Users and Uses of Accounting
Internal users of accounting information plan, organize, and run companies. They
work for the company.
Users need detailed accounting information on a timely basis; be available when it is
needed.
Investors and creditors are the main external users of accounting information;
others include: customers, taxing authorizes, regulatory agencies, economic
planners.
Ethical Behaviour
Ethics in accounting is of the utmost importance to accountants and decision-
makers who rely on the financial information they produce.
Forms of Business Organization
Proprietorship:
o Simple to set up; gives you control over the business; only relatively small
amount of money is needed to start; owner receives all profit, loses, and is
personally liable for all debt.
Partnership:
o Formed because one person does not have enough resources to initiate or
expand a business; partners bring unique skills to the partnership; unlimited
liability for all debts of the partnership; some can be formed with limited
liability with partners.
Corporations:
o You receive shares to indicate your ownership claim; investing relatively
small amounts of money.
o Factors that need to be considered when deciding which organizational form
to choose; legal liability and income taxes.
o Proprietors and partners pay personal income tax on their respective share
of the profits, while corporations pay income taxes as separate legal entities
on any corporate profits.
o Private corporations do not issue publicly traded shares; these companies
almost never distribute their financial statements publicly.
Business Activities
Financing Activities:
o Two ways to make money; (1) borrow money, (2) issuing/selling shares.
o Amounts owed to creditors are called liabilities.
o Funds taken from a line of credit owed to a bank is called bank indebtedness.

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o Short-term or long-term notes payable can apply to debt (i.e. mortgage,
lease, car etc.)
o Common shares in the term used to describe the amount paid by investors
for shares of ownership in a company.
o If you loan money to a company, you are their creditors; the law requires
that creditor claims be paid before shareholder claims.
o Companies pay shareholders a return on their investment on a regular basis,
as long as there is enough cash to cover required payments to creditors.
o Borrowing cash from lenders by issuing debt, or conversely, using cash to
repay debt; cash can be raised from issuing shares, or paid to shareholders
by distributing dividends.
Investing Activities
o Assets are resources that a company owns; assets are capable of short-term
of long-term lives; investments are short-term and long-term.
o Purchasing and disposing of long-lived assets such as property, plant, and
equipment and short-term or long-term investments.
Operating Activities
o Most of a company’s long-lived assets are purchased through investment
activities, assets with shorter lives result from operating activities.
o Amounts earned from sales of goods and services are called revenues;
revenues increase economic resources; an increase in an asset or a decrease
in a liability.
o Sources of revenue that are common to many businesses are sales revenue,
service revenue, and interest revenue.
o The right to receive money in the future is called accounts receivable; result
in future benefit.
o Other examples include: income tax receivable.
o Items that are held for future sale to customers result in an asset called
inventory; the cost of inventory sold is an expense called cost of goods sold.
o Expenses are the cost of assets that are consumed or services that are used
in the process of generating revenues; operating expenses, depreciation, and
interest expense.
o Obligations that businesses must pay are accounts payable; interest payable,
dividends payable, salaries payable, and goods and services taxes payable.
o When revenues are more than expenses, net earnings result; when expenses
exceed revenues, a net loss results.
o From day-to-day operations and include revenues and expenses related
accounts such as receivables, inventory, and payables.
Communicating With Users
Statement of Earnings reports revenues and expenses to show how successfully a
company performed during a period of time; issue of share and distribution of
dividends do not affect net earnings.
Statement of Retained Earnings indicates the portion of company’s earnings that
was distributed to you and the other shareholders of a company in the form of
dividends, and how much was retained in the business to allow for future growth;
cumulative earnings that have been retained in the corporation; pay high dividends
(Manitoba Telecom and Rothmans); pay low dividends (Indigo Books, RIM).
Balance Sheet presents a picture of what a company owns, what is owes, and it’s net
worth at a specific point in time; assets and claims to those assets at a specific point

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in time; claims of creditors before owners; shareholder’s equity is in two parts (1)
share capital, (2) retained earnings; creditors analyze the balance sheet for the
likelihood to repay debt.
Managers use the balance sheet to determine whether inventory is adequate to
support the future sales and whether cash on hand is sufficient for immediate cash
needs. Managers also look at the relationship between total liabilities and
shareholder’s equity to determine whether they have the best proportion of debt
and equity financing.
Cash Flow Statement shows where a company obtained cash during a period of time
and how that cash was used; provide financial information about the cash receipts
and cash payments of a business for a specific period; answers these questions: (1)
where did cash come from during this period? (2) how was cash used during the
period (3) what was the change in the cash balance during the period?.
The Statement of Shareholders Equity explains the changes in all of the equity
components.
The Statement of Comprehensive Income must be prepared by a business when
other types of income are gained or lost.
External reporting condenses and simplifies information so that it is easier for the
reader to understand.
Relationship Between Statements
(1) The Statement of Retained Earnings depends on the Statement of Earnings.
(2) The Balance Sheet and Statement of Retained Earnings are interrelated because
the ending amount on the Statement of Retained Earnings is reported as the
retained earnings amount in the Shareholder’s Equity section of the balance sheet.
(3) The Cash Flow and the Balance Sheet are also interrelated. The Cash Flow
statement shows how the cash account changed during the period by stating the
amount of cash at the beginning of the period, the sources and uses of cash during
the period, and the amount of cash at the end of the period. The ending amount of
cash shown must agree with the amount of cash on the assets section of the balance
sheet.
Elements of An Annual Report
Publicly traded companies must give their shareholders an annual report each year.
Included are nonfinancial (missions, goals, prospects etc.) and financial information
(management discussion and analysis, an auditor’s report, comparative statements,
notes, and summaries of key financial ratios.
Chapter 2: Financial Statements Framework, Presentation, and Usage
Conceptual Framework of Accounting
The conceptual framework of accounting is “a coherent system of interrelated
objectives and fundamentals that can lead to consistent standards and that
prescribes the nature, the function, and limits of financial accounting statements.
o Guides decisions about what to present in financial statements, alternative
ways of reporting economic events, and appropriate ways of communicating
this information.
1. It ensures that existing standards and practices are clear and consistent.
2. It makes it possible to respond quickly to new issues.
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