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AFM101 Sept 10, 2008 Lecture Notes

Chpt 2-6: Broad but more detailed overview of accounting = on midterm

Four Major Financial Statements:

Balance Sheet: Snapshot of the position of a companyo Measurement of the financial position

Income Statemento Performance of the company over a period of time

Statement of Retained Earnings (Or statement of shareholders equity)o Accumulated wealth of shareholders

Cash Flow Statemento Cash flow over period of time

External Users

Profit-oriented Organization

(eg. CPR, RIM) Who would be reading these financial statements? Creditors, Shareholders, Government

Customers, Labor union, Auditors,

Not-for-profit organization

(eg. Red Cross, Salvation Army, Hospitals, United Nations, University of Waterloo) No shareholders in not-for-profit organizations- Canada Revenue or large creditors have the power to force companies to provide financial

statements in a certain way.

GAAP (Generally Accepted Accounting Principles)

Rules for financial statements, set method of preparing Principles can change over time Differ Across Countries b/c principles evolve over time, in diff ways, in diff countries Eg. US principles Vs. CAN principles

National Versus International

Canadian Pacific Railway (CPR) Financial Statement

Tells which accounting principles they use (CAN Principles) (Rim uses US principles) Companies provide accounting principles according to the shareholders and people that must

look at their financial statements (eg. Trading shares on New York Stock Exchange, Canadian

stock exchange)

Sources

FASB (Financial Accounting Standards Board) IASB (International Accounting Standards Board)

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o Is creating IFRS (International Financial Reporting Standards)o Canada will be moving to IFRS by 2011

Good thing both accounting principles are similar By using IFRS, your financial statements will be understandable throughout much of the world SEC (securities and exchange commission)

Currency

Financial Statements can be prepared in ANY currency Eg. CPR uses Can dollars and US accounting principles Eg. RIM uses US dollars and US accounting principles If you operate in multiple countries, financial documents and currency must be translated

according to the country

Balance sheet

- Financial position of a company in a point of timeo How much do they own, how much do they owe

Assets

- Economic resources controlled by the entity- Eg. Inventory, prepaid expenses, cash, accounts receivables

Liabilities

- Obligations to the creditors of the organizations- Creditors are NOT owners of the organizations- Eg. Bank loans, accounts payable, mortgage payable, income tax payable

Owners Equity

-

Financing provided by the ownersFundamental Equation: ASSETS = Liabilities + Shareholders Equity

Income Tax Payable:

- Diff b/w calculation of tax and tax already paid to government- Can be an asset but usually liability