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MGCR 211 > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

Is a private company required to provide financial statements to the general public?

A

No - private companies are not requires to provide financial statements to the public

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2
Q

Example of a private company

A

Facebook prior to IPO

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3
Q

What is the major difference between private and public companies?

A

For private companies you need to be invited to become a shareholder. For public companies, since the stock shares are sold at stock exchange publicly you can just buy the stocks and becomes a shareholder

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4
Q

What do we call it when a company goes public?

A

IPO - Initial Public Offering. The company is isuing selling the general stock to the public for the first time.

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5
Q

What is the second major difference between private and public companies?

A

Public companies mandated to provide financial statements to general public. Private companies have financial statements but they share it among their stockholders and are not required to share it to the general public

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6
Q

Why did facebook go public? (in 2012)

A

Facebook wanted to raise more money and this could be a reason it went to stock market and sold shares in exchange for money. They started getting too many shareholders and because of the 500 shareholder rule they decided to go public

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7
Q

What is the 500 shareholder rule?

A

According to this rule private companies can have 499 shareholders and did not have to provide financial statements but if the number becomes 500 then company has to provide financial statements regardless of it is private or public.

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8
Q

What did the 500 shareholder rule change to in 2012?

A

The 2,000 shareholder rule

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9
Q

Where do we find financial statements?

A

In most cases for public companies you can go to the investor relation section of the company website you can get all kinds of reports

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10
Q

How many quarter financial statements does a company issue during a fiscal year?

A

3

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11
Q

What is form 10-Q?

A

Is represents quarterly financinal performance

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12
Q

What is form 10-K?

A

Represents annual financial performance. Applies to US companies (not Canada)

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13
Q

When do you have 10-K vs 10-Q?

A

1st 2nd and 3rd quarter you give 10-Q and 4th quarter you give 10-K. Can make inference of 4th quarter results based off of 1st 2nd 3rd quarter and annual report but not required to submit this.

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14
Q

What is financial accounting? (formal definition)

A

Information system in which the underlying economic conditions of organizatins are identified, recorded, and communicated to information users (e.g., mainly outside investors)

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15
Q

What are the three steps of financial accounting?

A

(1) Indentification
(2) Recording (measurement)
(3) Communication

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16
Q

What is financial accounting? (Informal definition)

A

The language of business. It involves story telling about a firm’s financial information

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17
Q

Why do firms talk about their financial stories?

A

They want your investment. It is a way to try to convince you to buy their shares

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18
Q

What happnes when companies tell flat out wrong stories about their companies’ financial stories?

A

They get sent to jail

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19
Q

What is the biggest “asset” in apple company?

A

Some might say the people. Without people, nothing happens.

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20
Q

What is the definition of asset in terms of accounting?

A

3 components:

(1) Has to come from past transaction
(2) There should be a present ownership and control
(3) Has to provide the future economic benefit which has to be measurable

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21
Q

Can you put human capital (people) on the company book as an asset?

A

No, because if we think about the definition of asset, corporations do not own or control people (so second point of definition is not met). It is also hard to quantify the value of human capital (so third point of definition is not met)

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22
Q

What is step 1 of the accounting process?

A

Identification

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23
Q

What is the difference between accounting event and economic event?

A

Accounting event is a subset of economic event:

- accounting events effect account numbers and economic events are captured by stock prices

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24
Q

What is accounting earnings?

A

Inside firm managers’ perception on the underlying firm fundamentals

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25
Q

What is stock price?

A

Ousiders’ perception on the underlying firm fundamentals

26
Q

Is CEO death an accounting event?

A

No, it is difficult to quantify CEO death in an objective manner. CEO death is one of the economic events that can affect stock prices

27
Q

Are all economic events part of accounting events?

A

No

28
Q

Is love an accounting event?

A

No since it is not quantifiable

29
Q

What are examples of significant economic events that cannot be part of accounting events because of quantifying issues?

A
  • Getting a new CEO
  • Employee love for a company
  • CEO getting sick
  • CEO death
30
Q

What is the second step in the accounting process?

A

Recording (measurement)

31
Q

What is one criteria accouting events must satisfy?

A

They should be quantifiable in an objective manner

32
Q

What is the third step in accounting process?

A

Communication

33
Q

How can we communicate the accounting process?

A

Using annual reports such as financinal statements

34
Q

Where can you find annual reports for US firms?

A

sec.gov

35
Q

Where can you find annual reports for canadian firms?

A

Sedar.com

36
Q

What are some financial statements?

A

(1) Statement of financial position (= Balance sheet)
(2) Statement of operations (=Income Statement)
(3) Statement of changes in equity
(4) Statement of cash flows

37
Q

How many pages in financial statements?

A

4 since we have 4 financial statements

38
Q

What is the composition of the annual report?

A

(1) Letters to shareholders
(2) MDLA section
(3) Auditors report
(4) 4 financial statements
(5) Notes to the fianncial statements explaining what happens

39
Q

What types of activities are all companies involved in?

A

(1) Financing
(2) Investing
(3) Operating

40
Q

What is operating activity?

A

The main day-to-day activities of the busniess. Examples include sources of income (revenue and income) and expenses

41
Q

What are the two types of financial activities?

A

(1) Selling or repurchasing shares (equity financing)

2) Borrowing money or repaying loans (debt financing) (there will be interest though

42
Q

What are the two definitions of investing activities?

A

(1) Purchasing or sale of long-lived assets such as property, plant and equipment and intangible assets
(2) Purchase or sale of investments, such as shares of other companies

43
Q

Can a firm do financing before operating (sale of products & services)?

A

Yes, a firm can engage in financing activities before creating or delivering any products or services

44
Q

Is a corporation a legal person?

A

Yes

45
Q

Definition of legal person?

A

Can buy and sell property with another company

46
Q

When did corporation become a legal person?

A

Since slaves were freed in 1868 due to the 14th amendment

47
Q

What is the definition of limited liability?

A

The separation between you and your business. Your business can borrow money from the bank but since there is a separation between you and your business you are not responsible for any debts incurred by the business. In this way you can protect your personal assets.

48
Q

What is an advantage and disadvantage of making corporations a separate legal person?

A

advantage: Limited liability = owners are not litable for the debts of the firm
disadvantage: double taxation

49
Q

What is a second form of organization besides corporation?

A

Sole proprietorship (unlimited libaility). Examples include small businesses like mom & pop stores

50
Q

What can shareholders get in exchange for contributed capital?

A

Dividen - corporation says thank you for holding the stock. It is redistribution from corporation back to the sharholder. Corporations do not have any obligation to pay dividend. Shareholders get dividend only if the sharholder decides to pay dividend

51
Q

What is the main objective of shareholders?

A

As shareholder main objective is to buy low and sell high your stocks.

52
Q

If you were an investor at a fast growing firm, would you want to recieve the dividend from the company?

A

No - If you want a constant stream of income you will buy the bond (becoming a lendor) not the stock. The reason you come to a stock market is because you think there will be high growth potential so you buy stock at low price and in the future you sell it at a higher price. You are not going to demand cash in this case because if the company wants to grow it is going to require cash. If you demand cash back (dividend) company will not grow and your stock will not increase in value

53
Q

What are some accounting questions you can ask a corporation?

A

How much money do you make ? = income statement

How much assets do you have and how did tou obtain them? = balance sheet

54
Q

What is on the left hand and right hand side of the balance sheet?

A

Left hand: A company’s economic resources

Right hand: The source of financing (debt vs equity)

55
Q

Are retained earnings cumulative?

A

Yes - earnings reatined or accumulated since opening the business

56
Q

Who has the top priority over oeprating earnings generated by a corporation?

A

Creditors (e.g., banks)

57
Q

What is is non-operating expenses?

A

Interest expense and tax expense

58
Q

Dividends are part of expense true or false?

A

False

59
Q

What is a change in equity statement?

A

Two components:

1) Share capital (e.e., common shares
(2) Retained earnings

60
Q

What is the change in share capital?

A

When a company sells more stocks to shareholders there will be an increase in common stock so there is a new contribution of cash from shareholders so a change in equity.
Alternatively, you can have a net income which increases and increases retained earnings so there is a change

MGCR 211 (19 decks)

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