Presentation Transcript

1. AFM 101 Midterm
2. 2010 Outreach Trip Summary Date Aug 20 – Sept 4 Location Cusco, Peru # Students 22 Project Cost $16,000 Building Projects Kindergarten Classroom provides free education Sewing Workshop enables better job prospects ELT Classroom enables better job prospects More info @ studentsofferingsupport.ca/blog
3. Introduction Course Coordinators Mateen: mateen_imran_11@hotmail.com Clark: clark_lc903@hotmail.com
4. Outline Chapter 1: Financial Statements Chapter 2: The Balance Sheet Chapter 3: The Income Statement Chapter 4: Adjustments Chapter 5: Statement of Cash Flows Chapter 6: Interpreting and Communicating Accounting Information
5. Chapter 1 4 Major Financial Statements: Balance Sheet Income Statement Statement of Retained Earnings Statement of Cash Flows
6. Chapter 1 Balance Sheet The company’s financial position at a point in time ABC Co. Balance Sheet December 31, 2009 Assets (list all assets) $XX Total Assets XX Liabilities (list all liabilities) $XX Owner’s Equity/Shareholder’s Equity (list owner’s equity components) XX Total Liabilities and Owner’s Equity XX
7. Chapter 1 Income Statement Measures the performance or operations of a company over a period of time ABC Co. Income Statement For the Year Ended December 31, 2009 Revenue (list all sources of revenue) $XX Total Revenue XX Expenses (list all Expenses) $XX Total Expenses XX Net Income XX
8. Chapter 1 Statement of Retained Earnings Retained Earnings is an account on the Balance Sheet It represents the accumulation of income from Year 1 of the business ABC Co. Statement of Retained Earnings For the Period Ended December 31, 2009 Beginning Retained Earnings $XX Add Net Income for period XX Subtract Dividends paid to shareholders XX Ending Retained Earnings XX
9. Chapter 1 Statement of Cash Flow Used to show the activity of cash by the company during the year Used to calculate the cash balance on the balance sheet ABC Co. Statement of Cash Flow For the Period Ended December 31, 2009 Cash flows from Operating Activities (list details) $XX Cash flows from Investing Activities (list details) $XX Cash flows from Financing Activities (list details) $XX Net Increase/Decrease in Cash XX Cash balance (Jan 1, 2009) XX Cash Balance (Dec 31, 2009) XX
10. Chapter 1
11. Chapter 1 Generally Accepted Accounting Principles (GAAP) Principles and guidelines used by management to account and record their company’s operations Auditor’s job is to see if financial statements are created in accordance to GAAP Now, Canada is moving towards a transition to IFRS IFRS will be an international set of standards that will allow greater comparability and consistency for companies across many different countries
12. Chapter 2 The Balance Sheet
13. Chapter 2 Remember the fundamental accounting equation A = L + SE
14. Chapter 2 Assets Current Assets Cash Short Term Investments Accounts Receivable Inventory Prepaid Expenses Non Current Assets Long term investments Capital Assets /PPE (property, plant, equipment) Intangible assets (patents, trademarks, licenses, etc.)
15. Chapter 2 Liabilities Current Liabilities Accounts Payable Notes Payable Accrued Liabilities (Income Tax, Salaries, Interest, etc.) Current Portion of Long Term Debt Long Term Liabilities Long term debt Mortgage Payable Bond Payable
16. Chapter 2 Shareholder’s Equity Share Capital / Common Shares Proceeds received when shareholders purchased their shares Retained Earnings The accumulation of net income from year 1 The balance comes from the statement of retained earnings If dividends are paid to shareholders, it comes out of retained earnings
17. Chapter 2
18. Chapter 2 Business Transactions How do we know ending balances on the B/S? Business transactions that occurred during the year must be recorded in the general journal Each journal entry gets posted to the specific accounts involved (General Ledger or T-account) Sum up the amounts in each T-account to determine the amount to report on the B/S at the end of the year
19. Chapter 2 Double Entry Accounting  DR = CR Debits are always on the left Credits are always on the right = + Shareholder’s Equity Debit Credit Share Capital Debit Credit Retained Earnings Debit Credit Assets Debit Credit Liabilities Debit Credit -+ -+ +- -+ -+ Dividends Net Income = Revenue - Expenses
20. Chapter 2 On Dec 31, ABC Co. purchased an equipment for $10,000. They paid $400 cash up front and the rest on account. Cash A/P Equipment
21. Chapter 2 On June 30, ABC Co. declared a $15,000 dividend to its shareholders. It was paid on Aug 1. Cash Dividends
22. Chapter 2 Assume a company's January 1, 2007, financial position was: Assets, $40,000 and Liabilities, $15,000. During January 2007, the company completed the following transactions: (a) paid the $8,000 in principle on a long term debt (b) collected accounts receivable, $4,000; (c) issued commons shares for cash, $2,000; (d) purchased a truck, paying $1,000 cash and $8,000 notes payable. The company's January 31, 2007, financial position is: Assets Liabilities Shareholder’s Equity 40,000 15,000 25,000
23. Chapter 3 The Income Statement
24. Chapter 3 Remember the “other” fundamental accounting equation Revenue – Expenses = Net Income
25. Chapter 3 Results of Continuing Operations Revenue/Sales $XX Less: Cost of Goods Sold (COGS) XX Gross Profit XX Operating Expenses Selling expenses $XX Depreciation XX Administrative expenses XX Total Operating Expenses XX Operating Income XX Other Revenue and Expenses XX Earnings before Income Tax XX Income Tax Expenses XX Net Income from Continuing Operations XX
26. Chapter 3 Rest of the Income Statement Net Income from Continuing Operations XX Discontinued Operations XX Income Before Extraordinary Events XX Extraordinary Events (+/-) XX Net Income XX Earnings Per Share XX
27. Chapter 3 The Accrual Basis of Accounting Determines when we can record revenue and expenses on our books Revenue Recognition Principle Matching Principle
28. Chapter 3 Revenue Recognition Principle Determines when revenue is considered earned 3 criteria Earnings process is complete Exchange takes place Collection of money is reasonably assured When 3 criterion are met, we can recognize the revenue on the income statement
29. Chapter 3 Matching Principle Determines when expenses are incurred Idea is that expenses should be incurred and recorded in the same period as the revenue it helped earn
30. Chapter 3 Cash Basis of Accounting Revenue is recognized when cash is received Expenses are incurred when the payment is made Cash 500 Revenue 500 Expense 300 Cash 300
31. Chapter 3 On September 30th ABC Co just made a $3,000 cash payment for the next 6 months of rent Cash Basis Accrual Basis **Cash is paid before the expense is incurred
32. Chapter 3 On Nov 25th TIX Co, a ticketing service agency received $5,000 worth of payments from customers for a Broadway show later in the year Cash Basis Accrual Basis **Cash is received before the revenue is earned
33. Chapter 3 The company received a $500 hydro bill on December 31st, they didn’t make the payment until the next fiscal period Cash Basis Accrual Basis **Expense is incurred before cash is paid
34. Chapter 3 You own a lawn-mowing business and you’ve mowed $200 worth of lawns, yet your clients have promised to pay within the next week Cash Basis Accrual Basis **Revenue is earned before payment is received
35. Chapter 3 Dangers of the Cash Basis With cash basis of accounting, we are recognizing revenue before it’s earned and expenses before they are incurred OR we’re not recording an entry to reflect the business transaction at all!
36. Chapter 4 Adjusting Entries
37. Chapter 4 During the Fiscal Period: Record Business Transactions – occurring throughout the fiscal year Record Adjusting Entries – recognize revenue when earned and expenses when incurred
38. Chapter 4 At the end of the fiscal period: Prepare Trial Balance – list all the accounts with their balances Prepare Year End Adjusting Entries – not triggered by a specific event, does not affect Cash Prepare Closing Entries – transfers net income to retained earnings Prepare Financial Statements
39. Chapter 4 Pre-Closing Trial Balance (before closing entries) ABC Co. Trial Balance December 31, 2009 Debit Credit Cash XX Accounts Receivable XX Inventory XX … … Accounts Payable XX Accrued Liabilities XX … … Share Capital XX Retained Earnings XX Revenue XX Other Revenue XX Salaries Expense XX Rent Expense XX …. …. Total XXXX
40. Chapter 4 Deferred Revenues (Unearned Revenue) – cash was received before revenue was earned During the fiscal period, when cash was received Adjustment (revenue is earned)
41. Chapter 4 On Jan 1st, ABC Co signed a contract stating they will provide 2 months of services. They received $1,200 payment up front. Jan 1st Jan 31st Feb 28th Revenue Cash Unearned Revenue
42. Chapter 4 Deferred Expense (Prepaid Expenses) – payment was made before expense was incurred During the fiscal period, when cash was paid out: Adjustment (when expenses are incurred): Adjust to reflect amount of expense incurred, and the asset used up:
43. Chapter 4 On Jan 1st, the Supplies account had an opening balance of $1,000. On April 30th, ABC Co purchased $500 worth of supplies. At December 31st, a count revealed only $700 worth of supplies were left April 30th December 31st Supplies $1,000 Supplies Expense
44. Chapter 4 Accrued Revenue (Receivables)– cash is received after revenue is earned During the fiscal period, when service /good is provided (set up a receivable) Adjustment when cash is received:
45. Chapter 4 On Mar 1st, ABC Co provided services worth $500, the customer subsequently paid on Apr 24th Mar 1st Apr 24th Service Revenue A/R
46. Chapter 4 Accrued Expense (Payable) - cash is paid out after an expense is incurred During the fiscal period, when expense is incurred (set up a payable): Adjustment when payment is made:
47. Chapter 4 The company pays their employees on a bi-weekly basis. Total salaries expense for each period is $20,000. The next payday is Jan 2nd. The company has a Dec 31st year end. Dec 31st Jan 2nd Salaries Expense A/P
48. Chapter 4 Amortization Matching Principle  match expense with revenue Capital Assets  used to generate revenue Therefore, portions of the cost of capital assets are allocated as amortization expense each period Cost Principle  assets are listed on the balance sheet at their historical cost (i.e. purchase price) Amortization is accumulated in a contra-asset account  accumulated amortization
49. Chapter 4 Capital Assets are listed at their net book value on the Balance Sheet Non-Current Assets Equipment 10,000 Less: Accumulated Amortization – Equipment 2,000 8,000 Equipment Accumulated Amortization: Equipment
50. Chapter 4 How much to amortize each period? Lots of different methods, right now we’ll look at the straight line method Amortization expense each period (usually 1 year) = [cost – residual value] / useful life
51. Chapter 4 On April 1st, ABC Co purchased equipment for 80,000 on account. It was assumed this equipment would have a salvage value of 8,000 and a useful life of 9 years. Record the journal entry on purchase date and the requirement adjusting entry at year end. April 1st December 31st
52. Chapter 4 Equipment Accumulated Amortization: Equipment 80,000 6,000 Year 1 on B/S: Equipment Accumulated Amortization Equipment Year 2 on B/S: Equipment Accumulated Amortization Equipment
53. Chapter 4 Interest Expense Companies borrow money by issuing Bond Payable or Note Payable Companies need to pay interest on the Bond or Note The interest paid is a percentage of the principle, stated in the contract beforehand Since interest payment days usually do not correspond with year end, adjusting entries must be made to recognize the interest expenses
54. Chapter 4 On April 1st, ABC Co issued a $10,000 bond paying 6% interest semi annually, interest is paid every September 30th and March 31st April 1st December 31st September 30th March 31st
55. Chapter 4 Closing Entries Remember the relationship between B/S and I/S At the end of the operating cycle, the company transfers the net income on the I/S to retained earnings through closing entries Temporary (Nominal) Accounts Revenue, Expense accounts Close out to retained earnings at end of fiscal period Start with $0 balance at beginning of fiscal period Permanent (Real) Accounts - accounts on the BS that have a balance at beginning of fiscal period - no need to close
56. Chapter 4 Closing Entries Close Revenue Accounts Sales Revenue XX Rent Revenue XX Income Summary XX - Income Summary is another temporary account used specifically during the closing entry process
57. Chapter 4 Closing Entries Close Expense Accounts Income Summary XX Rent Expense XX Salaries Expense XX Utilities Expense XX Interest Expense XX Income Tax Expense XX
58. Chapter 4 Closing Entries Close Income Summary Account If overall Net Income: Income Summary XX Retained Earnings XX If overall Net Loss: Retained Earnings XX Income Summary XX
59. Chapter 4 Trial Balance at beginning of year
60. Chapter 4 Cash Retained Earnings Share Capital Accounts Payable Small Tools Inventory Other Assets A/R Supplies Inventory 5,000 4,000 2,000 6,000 9,000 7,000 15,000 4,000
61. Chapter 4 Required: Record journal entries for transactions occurring in 2007, post to general ledger or t-accounts Record adjusting entries for 2007, post to general ledger or t-accounts Prepare the income statement Prepare closing entries and post to general ledger Prepare the balance sheet
62. Chapter 4 Share Capital a) Borrowed $25,000 cash on an 8% note payable, dated July 1, 2007 b) Purchased equipment for $18,000 cash on Jan 1, 2007 c) Issued 5,000 additional shares for $1 cash per share Cash 5,000 15,000
63. Chapter 4 Small Tools Inventory Accounts Payable d) Earned revenue for 2007 of $74,000 including $15,000 on credit e) Recognized other expenses for 2007 $35,000 including $9,000 on credit f) Purchased additional small tools inventory, $3,000 cash g) Collected A/R, $8,000 A/R Cash 5,000 18,000 25,000 5,000 6,000 4,000 7,000
64. Chapter 4 Accounts Payable Retained Earnings Supplies Inventory h) Paid A/P, $11,000 i) Purchased supplies on account, $10,000 j) Received a $3,000 deposit on work to start Jan 15, 2008 k) Declared and paid cash dividend, $12,000 A/R Cash 4,000 8,000 15,000 5,000 18,000 25,000 26,000 5,000 3,000 59,000 8,000 2,000 7,000 9,000 4,000
65. Chapter 4 Small Tools Inventory Supplies Inventory Adjusting Entries l) Service supplies inventory of $4,000 and small tools inventory of $9,000 were on hand at year end 2,000 10,000 6,000 3,000
66. Chapter 4 Adjusting Entries m) The equipment’s useful life is 4 years and salvage value is $2,000 Equipment 18,000
67. Chapter 4 Adjusting Entries n) Accrued interest on the notes payable has yet to be computed 8% note payable purchased on July 1, 2007 Note Payable 25,000
68. Chapter 4 Adjusting Entries o) Wages earned since December 24 pay date but not yet paid $4,000 p) Income tax expense payable in 2008, $4,000 Wages Expense Wages Payable Income Tax Expense Income Tax Payable
69. Chapter 4 Income Statement Accounts Service Revenue Wages Expense Income Tax Expense 74,000 4,000 4,000 Interest Expense Supplies Expense Other Expense Amortization Expense 4,000 1,000 8,000 35,000
70. Chapter 4 ABC Co. Income Statement For the Period Ended December 31, 2007 Service Revenue 74,000 Expenses Amortization Expense 4,000 Interest Expense 1,000 Supplies Expense 8,000 Wages Expense 4,000 Other Expenses 35,000 Income Tax Expense 4,00056,000 Net Income 18,000 Earnings Per Share (18,000 / 20,000) $0.9
71. Chapter 4 Closing Entries
72. Chapter 4 Retained Earnings Service Revenue Income Summary Amortization Expense Interest Expense 74,000 0 74,000 0 4,000 4,000 0 4,000 4,000 0 56,000 18,000 74,000 Supplies Expense Wages Expense Other Expense 4,000 8,000 8,000 0 4,000 4,000 0 35,000 35,000 0 12,000 18,000 10,000
73. Chapter 4 ABC Co; Balance Sheet; December 31, 2007 Assets Cash 35,000 Accounts Receivable 11,000 Supplies Inventory 4,000 Small Tools Inventory 9,000 Equipment 18,000 Accumulated Amortization – Equipment 4,000 14,000 Other Assets 9,000 Total Assets 82,000 Liabilities and Shareholder’s Equity Liabilities Accounts Payable 15,000 Notes Payable 25,000 Interest Payable 1,000 Income Tax Payable 4,000 Wages Payable 4,000 Deferred Revenue 3,000 Total Liabilities 52,000  Shareholder’s Equity Share Capital 20,000 Retained Earnings 10,000 Total Shareholder’s Equity 30,000 Total Liabilities and Shareholder’s Equity 82,000
74. Chapter 5 Cash Flow Statement
75. Chapter 5 Because of accrual basis revenues don’t always = cash collected expenses don’t always = cash paid out Cash flows are important! a company can be making a profit, but can go bankrupt if it has no cash inflows
76. Chapter 5 The cash flow statement looks at the activities within the company affecting cash The cash flow statement classifies activities involving cash in the company as operating, investing, and financing activities It gives us an increase or decrease of cash for the period Cash (Beginning Balance) +/- Increase or Decrease of Cash = Cash (Ending balance)
77. Chapter 5 Cash Flows from Operating Activities: Cash inflows/outflows related to the day-to-day operations of business Cash received from sales Cash received as dividends and interest Cash paid for operating expenses (i.e. salary, utilities, rent) Cash paid for taxes
78. Chapter 5 Cash Flows from Investing Activities: Cash inflows/outflows related to acquisitions and disposals of assets and investments in other companies Cash paid for buying new property or equipment Cash received from sale of property or equipment Cash paid for buying investments Cash received from sale of investments Interest received on the investments is cash inflow from operating activities
79. Chapter 5 Cash Flows from Financing Activities: Cash inflows/outflows related to the financing of the company from creditors or owners Cash received from debt borrowing (Bond Payable, Notes Payable, Mortgage Payable) Cash paid for repayment of the Bond Payable, Notes Payable, Mortgage Payable Interest paid on the debt is cash outflow from operating activities Cash received from issuing new shares Cash paid for repurchasing shares from existing owners Cash paid as dividends to shareholders of the company Dividend received from investing in another company’s shares is cash inflow from operating activities
80. Chapter 5 Non-cash Financing and Investing Activities Using shares or a debt instrument to buy an asset This transaction does NOT involve cash DR Equipment CR Debt/Common Shares However, it should be disclosed as this is a significant transaction
81. Chapter 5 Accounts and Types of Activities (General Guideline)
82. Chapter 5 Operating, investing or financing activity? A) Paying dividends to shareholders B) Sale of a piece of land and related building C) Investing in common stock of another company D) Repayment of a note payable E) Purchasing a supply of inventory F) Issuing Common Shares to new shareholders G) Receiving dividends on the shares purchased of other companies H) Borrowed money by issuing a bond
83. Chapter 5 Cash Flows from Operations section Direct method – record all the actual cash inflows and outflows that occurred in the period Indirect method – start with net income and adjust for any non-cash items Both methods give the same cash flow from operating activities number
84. Chapter 5 Direct Method + Cash Inflows Cash received from customers Cash received as interest and dividends - Cash Outflows Cash paid to suppliers Cash paid to employees Cash paid as interest = Cash Flow from Operations
85. Chapter 5 Indirect Method Net Income +/- Changes in current assets +/- Changes in current liabilities + Non cash expenses, losses - Non cash revenues, gains = Cash Flow from Operations
86. Chapter 5 Indirect Method Revenue Cash Received - Expenses - Cash Paid = Net Income = Net Cash Flows
87. Chapter 5 Changes in Current Assets (A/R, Inventory, Prepaid) Subtract increases in current assets Add decreases in current assets Why? A/R Beginning Revenue Cash Collected Ending Beginning A/R + Revenue – Cash Collected = Ending A/R
88. Chapter 5 Beginning A/R + Revenue – Cash Collected = Ending A/R IF Beginning A/R < Ending A/R  Increase in A/R Then Revenue – Cash Collected > 0 Revenue > Cash Collected SUBTRACT the difference from net income IF Beginning A/R > Ending A/R  Decrease in A/R Then Revenue – Cash Collected < 0 Revenue < Cash Collected  ADD the difference to net income
89. Chapter 5 Indirect Method Revenue Cash Received - Expenses - Cash Paid = Net Income = Net Cash Flows
90. Chapter 5 Changes in Current Liabilities (A/P, Interest Payable, Unearned Revenue, etc.) Add increases in current liabilities Subtract decreases in current liabilities Why? A/P Beginning Cash Paid Expenses Ending Beginning A/P + Expenses – Cash Paid = Ending A/P
91. Chapter 5 Beginning A/P + Expenses – Cash Paid = Ending A/P IF Beginning A/P < Ending A/P  Increase in A/P Then Expenses – Cash Paid > 0 Expenses > Cash Paid Since expenses are subtracted to arrive at net income and our actual cash outflows are less than actual expenses  ADD the difference to net income IF Beginning A/P > Ending A/P  Decrease in A/P Then Expenses – Cash Paid < 0 Expenses < Cash Paid  Since expenses are subtracted to arrive at net income and our actual cash outflows are greater than actual expenses  SUBTRACT the difference from net income
92. Chapter 5 Indirect Method Revenue Cash Received - Expenses - Cash Paid = Net Income = Net Cash Flows
93. Chapter 5 Non cash expenses and losses Add expense amounts on the income statement that do not affect cash Depreciation expense, future income tax expense Add losses on sale of assets or investments Accounted for in the investing section Add losses on repayment of long term debt Accounted for in the financing section
94. Chapter 5 Indirect Method Revenue Cash Received - Expenses - Cash Paid = Net Income = Net Cash Flows
95. Chapter 5 Non cash revenues and gains Subtract revenue amounts on the income statement that do not affect cash Subtract gains on sale of assets or investments Accounted for in the investing section Subtract gains on repayment of long term debt Accounted for in the financing section
96. Chapter 5 Indirect Method Revenue Cash Received - Expenses - Cash Paid = Net Income = Net Cash Flows
97. Chapter 5 Required: Prepare the statement of cash flows for SOS Limited for 2009 using the indirect method.
98. Chapter 5 The following information relates to activities for SOS Limited for 2009. Net income for the year ended December 31, 2009, was $22,500. The company borrowed $20,000 on a long-term note from the bank. Interest is payable annually and the interest expense of $3,000 is included in net income. An additional piece of land was purchased on November 30, 2009. The seller of the land accepted a mortgage as full payment. During the year, a piece of equipment was sold for $15,000, paid in cash. Any gain or loss on the sale was included in net income. A new piece of equipment costing $28,000 was purchased in June. The purchase price was paid in cash. Dividends of $6,000 were paid in cash. Capital stock was issued in exchange for the retirement of $7,000 of long-term notes payable. A portion of the bonds matured during 2009 and the company paid cash to redeem these bonds.
99. Chapter 5 Cash flows from operating activities Net Income 22,500 Adjustments: Increase in A/R Increase in Inventory Decrease in Prepaid Increase in A/P Increase in Interest Payable ?? Net income for the year ended December 31, 2009, was $22,500
100. Chapter 5 c) An additional piece of land was purchased on November 30, 2009. The seller of the land accepted a mortgage as full payment. d) During the year, a piece of equipment was sold for $15,000, paid in cash. Any gain or loss on the sale was included in net income. A new piece of equipment costing $28,000 was purchased in June. The purchase price was paid in cash. Cash flows from Investment activities:
101. Chapter 5 d) During the year, a piece of equipment was sold for $15,000, paid in cash. Any gain or loss on the sale was included in net income. A new piece of equipment costing $28,000 was purchased in June. The purchase price was paid in cash. Equipment Accumulated Amortization: Equipment
102. Chapter 5 d) During the year, a piece of equipment was sold for $15,000, paid in cash. Any gain or loss on the sale was included in net income. A new piece of equipment costing $28,000 was purchased in June. The purchase price was paid in cash. Gain on sale of equipment = Sale Price – Net Book Value of equipment Net Book Value = Cost – Accumulated Amortization
103. Chapter 5 Cash flows from operating activities Net Income 22,500 Adjustments: Increase in A/R (4,000) Increase in Inventory (4,400) Decrease in Prepaid 2,500 Increase in A/P 6,000 Increase in Interest Payable 600 Amortization Expense 14,000 Gain on Sale of Equipment (8,000) Net Cash Flows from Operating Activities 29,200 Cash flows from investing activities Cash paid for purchase of new equipment (28,000) Cash received for sale of equipment 15,000 Net Cash Flows from Investing Activities (13,000)
104. Chapter 5  b) The company borrowed $20,000 on a long-term note from the bank. Interest is payable annually and the interest expense of $3,000 is included in net income. e) Dividends of $6,000 were paid in cash. f) Capital stock was issued in exchange for the retirement of $7,000 of long-term notes payable. g) A portion of the bonds matured during 2009 and the company paid cash to redeem these bonds. Cash flows from financing: Borrowed N/P Dividends Paid B/P matured Note Payable
105. Chapter 5 Cash flows from operating activities Net Income 22,500 Adjustments: Increase in A/R (4,000) Increase in Inventory (4,400) Decrease in Prepaid 2,500 Increase in A/P 6,000 Increase in Interest Payable 600 Amortization Expense 14,000 Gain on Sale of Equipment (8,000) Net Cash Flows from Operating Activities 29,200 Cash flows from investing activities Cash paid for purchase of new equipment (28,000) Cash received for sale of equipment 15,000 Net Cash Flows from Investing Activities (13,000) Cash flows from financing activities Cash received from issuance of N/P 20,000 Cash paid for dividends (6,000) Cash paid for redemption of bonds (20,000) Net Cash Flows from Financing Activities (6,000) Net Increase in Cash 10,200 Cash (Begin) 10,000 Cash (End) 20,200
106. Chapter 5
107. Chapter 6  Participants in Accounting Process Company  want to produce financial statements for external users Different parties will be involved in this process
108. Chapter 6  Participants in Accounting Process Regulators Sets the standards of how to report financial information The “rules” that the company must follow Management CEO, CFO, other executives Decide on which accounting methods to use
109. Chapter 6  Participants in Accounting Process Board of Directors The voice for shareholders Ensures the integrity of the company Auditors Independent third parties Issues an opinion on whether FS are in compliance with standards Issues the Auditor’s Report
110. Chapter 6  Participants in Accounting Process Auditors do NOT have an opinion on the financial wealth of the company Financial Analysts Takes public information and analyzes the financial position of the company Makes recommendations on whether buy, hold, or sell the stock
111. Chapter 6 Characteristics of Useful Information Relevant predictive, timely Reliable verifiable, accurate, neutral Comparable can be compared across different companies or against itself Consistent use same accounting principles over time, or makes a disclosure if accounting methods are changed
112. Chapter 6 How much information is TOO MUCH? Materiality Some accounts are not significant, will not affect the user’s decisions Cost-benefit constraint Management should think about the costs of obtaining more information Conservatism It’s better to understate assets and overstate liabilities
113. Ratios Make sure you understand what each ratio means Ratios need to be compared against a benchmark companies in the same industry against prior years financial figures
114. Chapter 1 Price Earnings Ratio = Market Price Net Income Investors will multiply the P/E ratio with expected or actual net income to generate a “price” one would pay for the company The higher the ratio, the greater confidence investors have in the company’s ability to generate income
115. Chapter 2 Debt to Equity Ratio = Total Liabilities Total Owners’ Equity Measures how much debt has been used to finance the company versus financing through the owners/shareholders of the company A ratio larger than 1 means the company uses more debt than equity to finance A high debt-to-equity ratio means there is a higher risk that a company may not be able to meet its financial obligations
116. Chapter 3 Asset Turnover = ____Total Sales____ Average Total Assets Average total assets = [beginning assets + ending assets] / 2 Measures how much revenue is generated by every $1 of assets Measures company’s effectiveness at utilizing assets to generate revenue A higher ratio is more favourable
117. Chapter 3 Return on Assets = ____Net Income____ Average Total Assets Average total assets = [beginning assets + ending assets] / 2 Measures how much income is generated by every $1 of assets Measures company’s effectiveness at utilizing assets to generate income A higher ratio is more favourable
118. Chapter 4 Net Profit Margin = Net Income Net Sales Measures how much income is generated for each dollar of sales For every $1 of sales, how much does the company get to retain? A higher net profit margin is more favourable
119. Chapter 4 Return on Equity (ROE) = ________Net Income_____ Average Shareholders’ Equity Measures how much income is generated for each dollar of shareholder’s equity Measures ability the earn income for owners/ shareholders A higher ratio is more favourable
120. Chapter 5 Quality of Income Ratio = __Cash Flow from Operating Activities__ Net Income Measures portion of income generated in cash A higher ratio indicates greater ability to finance operating activities from cash inflows
121. Chapter 5 Capital Acquisition Ratio = ____Cash Flow from Operating Activities____ Cash Paid for Property, Plant, and Equipment Measures the ability of company to pay for PPE purchases using available cash, without relying on debt or equity financing High ratio indicates less need for outside financing to acquire new capital assets