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 company o Measurement of the financial position Income Statement o 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 Statement o 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)

Is creating IFRS (International Financial Reporting Standards) 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)

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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 time o 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 owners Fundamental 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