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Chapter 1

Chapter 1 BU227.docx

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Department
Business
Course
BU227
Professor
Carolyn Mac Tavish
Semester
Fall

Description
BU227 Chapter 1 – Financial Statements and Business Decisions Week 1 Accounting – is a system that collects and processes (analyzes, measures, and records) financial information about an organization and reports that information to decision makers. The Four Basic Financial Statements: An Overview -These are prepared for for-profit companies -These statements are provide to inform investors, creditors, and other external decision makers -Summarize the financial activities of the business -Can apply to any time span The Statement of Financial Position -To report the financial position of an accounting entity at a particular point in time Structure This is the structure for the heading: 1. Name of the entity - The Nestle Group 2. Title of the statement – Statement of Financial Position 3. Specific date of the Statement – At December 31, 2009 4. Unit of measure – (in millions of Swiss francs) -The statement of financial position first lists the company’s assets -Assets are then followed by liabilities and shareholders’ equity -Financing provided by creditors creates a liability -Financing provided by the owner creates owner’s equity -Accounting entity – the organization for which financial date are to be collected -Assets = Liabilities + Shareholders’ Equity -Shareholder’s equity is made up of: -Share capital – the investment of cash and other assets in the business by the owners in exchange for shares -Retained earnings – amount of earnings reinvested in the business -Other components – reflect the change in the values of assets and liabilities over time Format -Assets may be listed in either increasing r decreasing order of their convertibility to cash -Most financial statements include the monetary unit sign -Place a single underline below the last item in a group before a total or subtotal -A double underline is also placed below grand totals -The same conventions are followed in all four basic financial statements The Statement of Comprehensive Income -Reports the change in shareholders’ equity, during a period, from business activities other than investments by shareholders or distributions to shareholders -Heading follows same format as the statement of financial position – name of the entity, title of the statement, accounting period, unit of measure BU227 Chapter 1 – Financial Statements and Business Decisions Week 1 Statement of Comprehensive Income Revenues -Expenses Profit + Other comprehensive income Comprehensive Income Revenues – Expenses = Profit -Trade receivable – a promise of future payment -Various terms are used in financial statements to describe different sources of revenue – provision of services, sale of goods, rental of property, other income -The expense reported in one accounting period may actually be paid for in cash in another accounting period -Profit normally does not equal the new cash generated by operations The Statement of Changes in Equity -Reports the way that profit, distribution of profit (dividends), and other changes to shareholders’ equity affected the company’s financial position during the accounting period -The Statement of Changes in Equity – reports all changes to shareholder’s equity during the accounting period -Retained earnings – reflect the profits that have been earned since the creation of the company but not distributed yet shareholders as dividends Beginning retained earnings + Profit – Dividends = Ending Retained earnings -The heading remains the same: name of the entity, title of the statement, accounting period, unit of measure Statement of Changes in Equity Equity, beginning of the period + Profit for the year +Other comprehensive income - Dividends +/- other changes, net Equity, end of period The Statement of Cash Flows -Divides it into cash inflows (receipts) and outflows (payments) into three primary categories: cash flows from operating, investing, and financing activities -Heading identifies the name of the entity, title of the statement, and unit of measure used BU227 Chapter 1 – Financial Statements and Business Decisions Week 1 Statement of Cash Flows +/- Cash flow operating +/- Cash flow investing +/- Cash flow financing activities Change in cash -Cash flows from operating activities are cash flows that are directly related to earning income – Ex. Paying salaries -Cash flows from investing activities includes cash flows related to the acquisition or sale of the company’s productive assets – Ex. Purchase of additional property -Cash flows from financing activities are directly related to the financing of the company itself – Ex receipts and payments of cash to investors and creditors Relationships among the Four Financial Statements 1. Profit from the income statement resuls in an increase in ending retained earnings on the statement of changes in equity 2. Ending retained earnings from the statement of changes in equity is one of the here components of shareholders’ equity on the statement of financial position 3 The change in cash on the statement o cash flows added to the cash balance at the beginning if the year equals the balance of cash at the end of the year, which appears on the statement of financial position -As external users, we can think of the income statement, as explaining through the statement of changes in equity, how the operations of the company changed its financial position during the year. The statement of cash flows explains how the operating, investing, and financing activities of the company affected the cash balance on the statement of financial position during the year. Notes to Financial Statements -You will often find at the bottom of the four financial statements “the notes are an integral part of these financi
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