Study Notes for COMM1140 Financial Management

Course Focus: Understanding financial accounting information, including financial statements and the skills necessary for business leaders and entrepreneurs.

Accrual Accounting: Recognizes revenues and expenses when they occur, not when cash is exchanged.
Cash Accounting: Records revenues when cash is received and expenses when cash is paid.
Revenues: Increases in company wealth, exemplified by:
- Sales revenue
- Interest income from bank accounts or investments
- Dividend revenue from investments
Expenses: Decreases in company wealth necessary to earn revenue:
- Examples: Wages expense, electricity expense.
Note: Expenses do not include payments to owners (e.g., dividends to shareholders).

Tutorial Participation: 15% (Weeks 2-5, 7-10)
Group Presentation: 25% (Online Video Submission due Week 9, In-Class Presentation Week 10)
Final Exam: 60%

Understand the presentation of accounting information through financial statements.
Describe the relationship between the balance sheet and income statement, particularly retained profits.
Identify components of the income statement, balance sheet, and cash flow statement.
Prepare an income statement and balance sheet.

Annual Report: A comprehensive document produced at the end of the financial year, detailing financial performance, operational activities, and overall position.
- Crucial for stakeholders: investors, employees, customers, and regulators.
- Sources: Company websites, stock exchanges.

Definition: Reports the financial position of a company at a specific point in time (also known as Statement of Financial Position).
Key Elements:
- Assets: Company resources at a point in time.
- Examples: cash, accounts receivable, property, equipment, inventory.
- Liabilities: Company's debts and financial obligations.
- Examples: accounts payable, loans, taxes payable.
- Shareholders' Equity: Owner's claim on assets post-liabilities (calculated as $(SE = A - L)$ ).
- Examples: Share capital, retained profits.

Definition: Reflects the financial performance of a company over a specific period (also known as Statement of Financial Performance or Profit & Loss Statement).
Elements:
- Revenues (inflows that increase Shareholders’ Equity).
- Expenses (outflows that decrease Shareholders’ Equity).
- Profit/Loss determination based on revenue and expense comparison (Net profit if revenues > expenses; Net loss otherwise).
- Example: Revenues include sales revenue; expenses might be wages.

Definition: Showcases cash movements over a period (using cash accounting).
- Categories:
- Operating Activities: Core business activities (receipts from customers, payments to suppliers).
- Investing Activities: Long-term asset transactions (sales/purchases of property, dividends received).
- Financing Activities: Equity and debt transactions (borrowings, repayments, dividends paid).
Importance: Indicates sufficient cash for operational efficiency and obligations (paying expenses/taxes, purchasing assets).

Sample Layout:
- Assets:
- Cash: $2,000
- Accounts Receivable: $16,000
- Inventory: $12,000
- Property: $90,000
- Total Assets: $120,000
- Liabilities:
- Accounts Payable: $17,000
- Equity:
- Share Capital: $40,000
- Retained Profits: $27,000
- Total Liabilities & Equity: $120,000

Example Transactions:
- Apartment purchase fully financed with a loan.
- Purchase partially financed with cash.

Retained Profits:
- Total cumulative profits less dividends paid to shareholders.
- Linkage between income statement and balance sheet through retained profits (part of shareholder equity).
Shareholder Equity: Residual interest after deducting liabilities.
Profit Distribution: Profits can be distributed as dividends or retained.
- Accrued profits are kept for business growth.

Calculation:
- Opening Retained Profits + Net Profit (or Loss) - Dividends = Closing Retained Profits.
- A clear understanding of profit allocation for business growth versus shareholder payment.

Balance Sheet: Statement of company’s financial position. Includes classification of assets (current vs. non-current) and liabilities (current vs non-current).
Income Statement: Reflection of performance, calculating profit/loss, using accrual accounting.
Cash Flow Statement: Important for tracking cash movements using cash accounting.

Results for Year ended June 30, 2023:
- Revenues: $1,500,000
- Less Cost of Goods Sold: $700,000
- Profit Calculation: Profit after tax $465,000 (earnings).

Create Income Statement: Recognizing transactions based on accrual accounting.
Create Balance Sheet: Calculates total assets, liabilities, and equity after transactions.