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Chapter chapter 2

Management and Organizational Studies 1023A/B Chapter Notes - Chapter chapter 2: Income Statement


Department
Management and Organizational Studies
Course Code
MOS 1023A/B
Professor
Meaghan Ross
Chapter
chapter 2

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MOS 1023- PAGES 54-74
THE CLASSIFIED STATEMENT OF FINANCIAL POSITION
(BALANCE SHEET)
-As we know the financial statement is: the statement of financial position, income
statement, statement of changes in equity, and statements of cash flows.
-The statement of financial position, also known as the Balance sheet, shows a company’s
assets, liabilities, and shareholders’ equity-at a point in time.
-To improve a users understanding, a companys financial position, companies group
similar types of assets and similar types of liabilities together.
-A classified statement of financial position generally contains the standard
classifications, ordered in illustration 2-1 (p.56). (order will be in upcoming notes.)
-The classifications/grouping s will help readers determine things such as:
1-whether the company has enough assets to pay debts when they’re due.
2-The claims of short- and long-term creditors and lenders on the company’s total
assets
ASSETS
-Assets are the resources that a company owns or controls that will provide a future
economic benefit.
-Include resources whose benefits will be realized within one year (current assets) and
resources whose benefits will be realized more than one year (non-current assets)
CURRENT ASSETS
-CURENT ASSETS- Assets that are expected to be converted to cash or will be sold or
used up within one year of the company’s financial statement date, or its operating cycle
(which ever is longer).
-Operating cycle of a company is the average time it takes to go from cash to cash in
producing revenueCycle for most businesses is less than a year.
-Cash to cash means outlay of cash to produce goods, sell the goods, and receive cash
from customers in exchange for the goods.
-TYPES OF CURRENT ASSETS:
-Cash, Notes receivable, including loans receivable, Short-term investments,
Merchandise inventory, Accounts receivable, Supplies, Accrued receivables,
Prepaid expenses
-SHORT-TERM INVESTMENTS-Investments in debt securities (ex. bonds of another
company) or equity securities (ex. shares of another company) that are held to gather
interest income and/or gains from profitable resale in the near term. Also known as
trading investments.
-ACCOUNTS RECEIVABLE-Amounts of owed to the company by customers who
purchased products on credit (on account).
-ACCRUED RECEIVABLES-Amounts owed to the company for interest, tax, rent,
sales, and like items. Represent revenues earned that have not yet been received in cash.
-NOTES RECEIVABLE-Are amounts owed to the company by customers or others that
are supported by a written promise to repay.

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-INVENTORY-refers to goods held for sale to customers, including “finished” and
“Unfinished” goods. Will be sold for cash or accounts receivable.
-SUPPLIES-Include consumable items like office supplies and cleaning supplies. They
are current assets b/c assume that they will be used up by the end of a year.
-PREPPAID EXPENSES-Represent the cost of things like rent and insurance paid in
advance of use. Are current assets, as they reflect unused benefits available for use
during the year.
-Total current assets must be disclosed, but there is no prescribed order for current assets
to be presented on the statement of financial position.
-Write down order in term of liquidity (order in which they are expected to be converted
to cash (most likely to sell to least?))
NON-CURRENT ASSETS
-NON-CURRENT ASSETS-Not expected to converted into cash, sold, or used up by the
business within one year of the financial statement or its operating cycle. (Anything thats
not a current asset)
-Investments, property, plant, and equipment, intangible assets and goodwill,
other assets.
-LONG-TERM INVESTMENTS- (1)Include multi-yeat investments in debt securities
(loans, notes, bonds, or mortgages) that management intends to hold to earn interest, and
(2) equity securities (shares) in other companies that management plans to hold for many
years to generate interest revenue or for strategic reasons.
-PROPERTY, PLANT, AND EQUIPMENT- Tangible assets with relatively long useful
lives that are currently being used in operating the business. Includes land, buildings,
equipment and furniture.
-Usually listed in order of permanency  Land (usually first b/c it has indefinite life),
followed by the asset with the next longest useful life (normally building).
-Most companies record their property, plant, and equipment at cost, but some companies
choose to record the assets at fair value instead.  Known as Revaluation modelOften
used in real estate.
-Except for land, everything has an estimated useful life, over which they are expected to
generate revenues. B/c of this, their cost is allocated (distributed) over their estimated
useful lives through a process called depreciation.
-Companies calculate depreciation by systematically assigning a portion of the asset’s
cost to expense each year (rather than expensing the full cost in the year the asset was
purchased).
-Only assets with estimated useful lives are depreciated. (Land is not depreciated)
-Assets that are depreciated should be reported on the statement of financial position at
cost less their accumulated depreciation.
-ACCUMULATED DEPRECIATION shows the amount of depreciation taken so far over
the life of the asset.
-It is a CONTRA ASSET ACCOUNT, meaning its balance is subtracted from the balance
of the asset that it relates to.
-The difference b/w cost and accumulated depreciation is referred to as the carrying
amount (Net book value or book value).
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INTANGIBLE ASSETS
-Cannot be seen but are valuable.
-Non-current assets that do not have physical substance and that represent a privilege or a
right granted to, or held by a company.
-Examples include: Patents, copyrights, franchises, trademarks, trade names, and licences
that give the company an exclusive right of use for a specified period of time.
-Normally divided into 2 groups for accounting purposes: those with definite lives, and
those with indefinite lives.
-Cost of intangible assets with definite lives is allocated over these future periods.
-Intangible assets with indefinite lives are not allocated over future periods.
-IFRS for publically traded companies recommends the use of the term depreciation
to refer to the allocation of costs over the useful lives of depreciable property, plant, and
equipment and the term amortization to refer to the allocation of the costs of certain
kinds of intangible asset.
-Accounting standards for private enterprises recommend the term amortization to
allocate the cost of both, property, plant, and equipment and intangible assets.
-Goodwill is similar to an intangible asset, it results from the acquisition of another
company when the price paid for the company is higher than the fair value of the
purchased company’s net identifiable assets.
-The value of a company’s brand name, solid customer base, good customer relations,
good employee relations and any patents or proprietary technology represent goodwill.
-Goodwill is calculatedThe difference b/w the price paid for and the fair value of the
assets acquired of the purchased company.
-Not a physical substance, but generates future value, cannot be separated from the
company, only way to sell is to sell the acquired company.
-Deferred income tax assets represents the income tax that is expected to be recovered in
a later year(s) due to deductions that a company is able to take when preparing its future
income return.
LIABILITIES
-Liabilities are obligations that result from past transactions, can be current or non-
current.
CURRENT LIABILITIES
-Obligations to be paid/settled within 1 year of the company’s statement date or its
operating cycle (whichever is longer).
-examples are: Bank indebtedness, accounts payable, accrued liabilities, notes payable
including bank loans, current maturities of long-term debt.
-BANK INDEBTEDNESS is a short-term loan from a bank, typically occurring when a
company uses an operating line of credit to cover cash shortfalls.
-ACCOUNT PAYABLE-Represents amounts owed by the company to the suppliers for
purchases made on credit (account).
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