Lecture 2 0125 - ORIE 350 Financial and Managerial...

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    ORIE 350 Financial and Managerial  Accounting Lecture #2 January 25, 2007
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    Time ran out Time ran out, start here Thursday
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    Balance Sheet Reports the resources of the company (assets), the company’s obligations (liabilities) and the stockholders’ portion (stockholder’s equity). A snapshot, it is only true or accurate at an instant in time. Usually this is at the end of the year or quarter-year.
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    Income Statement Reports the difference between revenues and expenses over the past time period (either year or quarter). This is known as net income. If this difference is a positive number, it is a profit. If this difference is a negative number, it is a loss . A historical number! Also called the “P&L” (for “profit and loss”).
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    Statement of Cash Flows 1. Reports the various amounts of cash collected and used over the past period. 2. Classifies each collection or use into either operating, financing, and investing activities.
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    Statement of Retained Earnings Summarizes the effects of income on the retained earnings. Can be complex with corporations with complicated stock structures. Since we look only at simple structures in this class, the SoRE will not be looked at extensively.
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    Other elements in an annual report Management discussion. Take credit for good news, lay blame for bad news. Notes. There is lots of important information in this section having to do with policies and accounting procedures. Auditor’s report. Independent examination of the company’s financial statements.
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    Audits don’t always uncover flaws…
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    Assumptions in Financial  Accounting 1. Monetary units – accounts and transactions are recorded in dollar value terms. Ketola Furniture Company does not say they sold 2000 chairs, 400 tables and 350 bar stools last quarter. Rather, they say they sold $800,000 in furniture, recorded at the selling price.
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    Assumptions in Financial  Accounting 2. Economic Entity – each party in a transaction is a separate economic entity, and the transaction is made at arm’s length, each party undertakes the transaction at terms acceptable to it. No one is forced to sell a product or buy a product under duress, they do so willingly. As such, the transaction dollar values are accurate ones.
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    Assumptions in Financial  Accounting 3. Time period – each accounting statement is for a specific time period. Transactions occurring in a specific time period must appear on that period’s financial statements. Common time periods are the quarter (3 months) and the year.
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    Assumptions 4. Going Concern – while many firms go out of business each year, the accounting statements almost always reflects the assumption that the business is a “going concern,” i.e., that it will continue to operate as a business for the foreseeable future.
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