AFM 101 Chapter 2 Notes - Chapter 2 Notes Primary Objective...

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Chapter 2 Notes Primary Objective of External Financial Accounting: to provide useful economic information to help external parties make financial decisions - Users of accounting info are called decision makers - Users want to look at this information to see how a business will perform in the future. For example by looking at the statement of financial position, they can see if a company can pay back their principle on loans as well as any interest incurred o Also they look at things like dividends, and things that benefit them so they can get capital gains Accounting Assumptions (IFRS/GAAP rules) 1. Separate Entity Assumption: a business’ transactions must be kept separate from the transactions of the owner. If it is for personal use, it cannot be on the balance sheet of the company 2. Unit of Measure assumption: accounting information should be measured and reported in the national monetary unit/ the country’s currency 3. Continuity (going-concern) Assumption: states that we expect/ assume a company will continue to operate in the future unless otherwise stated. In the case that it will not continue operation, then the balance sheet must show that the company is being liquidated (selling all assets and paying liabilities). 4. Cost principle: Requires assets to be recorded at their historical cost, or cost that they were paid for. Sometimes companies will pay using cash and trading an asset. In this case, the cost to be recorded for the new asset is the cash paid plus the market value of the traded asset at the time of the trade. Recap: Assets are economic resources that are controlled by an entity as a result of past transactions/ events, from which future benefits may be obtained. - We can further classify assets into: o Current assets: Assets that can be turned to cash within 1 year. Inventories are current regardless. These are ordered in terms of liquidity Cash and cash equivalents (highly liquid investments) Short-term investments which are excess investments Trade and other receivables Inventory Prepayments Other current assets o Long term assets: Will be turned to cash after 1 year Property plant and equipment Investment in associates (amount invested in shares of associated corporations)
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  • Fall '08
  • KENNEDY
  • Balance Sheet, Current Assets, Generally Accepted Accounting Principles

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