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MOS 1023 Chapter 1: The Purpose and Use of Financial Statements > Chapter 1 (1.3) > Flashcards

Chapter 1 (1.3) Flashcards

Types of Business Activities

1
Q

What are the 3 types of activities all businesses are involved in?

A
  1. Financing
  2. Investing
  3. Operating
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2
Q

What can each of the 3 types of activities result in?

A

Inflows of cash (cash flowing into the company) or outflows of cash (cash flowing out of the company)

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3
Q

What are financing activities?

A

Activities that report the cash effects of debt or equity financing. These include (1) borrowing or repaying cash from (to) lenders, and (2) issuing or reacquiring shares or paying dividends to investors.

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4
Q

What is an example of a corporations financing activities?

A

North West borrowed $44,785 thousand (an inflow) in 2019 as it continued to expand its operations. Also distributed $62,329 thousand in dividends to its shareholders + other financing activity activities = in a net outflow of cash related to financing activities

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5
Q

What are investing activities?

A

Activities that report the cash effects of purchasing and disposing of long-lived assets such as property, plant, and equipment and investments not held for trading

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6
Q

What is an example of a corporations investing activities?

A

NW’s investing activities: cash outflows of $93,555 thousand (building new stores, undertaking major store renovations, and purchasing new fixtures and computer equipment), invested $9,664 thousand (new point-of-sale, merchandise management, and workforce management systems)

Result in net outflow of cash from investing activities

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7
Q

What are operating activities?

A

Activities that result from day-to-day operations. They report the cash effects of transactions that create revenues and expenses.

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8
Q

Give an example of a corps operating activities.

A

NW able to generate a net cash inflow of $127,120 thousand from its operating activities

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9
Q

What did North West corp use its net cash inflow towards?

A

To fund dividend distributions and help finance the investments the company made in its stores, fixtures, computer equipment, and system

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10
Q

What is required to start any business?

A

Capital (money)

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11
Q

What are the 2 primary ways of raising capital for corporations?

A
  1. Issuing (selling) shares (equity financing) in exchange for cash (or other assets)
  2. Borrowing money (debt financing)
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12
Q

What is the first transaction when establishing a corporation?

A

The issue of shares to shareholders in exchange for cash or other assets. May subsequently obtain additional equity financing by selling additional shares to investors

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13
Q

The issue of shares for cash results in an ______ of cash

A

Inflow

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14
Q

What is an example of a corporation’s first transaction (issue of shares)?

A

North West first issued common shares to the general public in 1992 when it became a publicly traded corporation and listed its shares for sale on the Winnipeg and Toronto Stock Exchanges.

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15
Q

What are common shares typically issued in exchange for? What do they represent?

A

Cash paid by investors, who are known as shareholders.
Represent the shareholders’ ownership in a company

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16
Q

Are there many types of shares? Give an example.

A

Common shares are just one class/type of shares (collectively known as share capital) that a company can issue

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17
Q

What is a share capital?

A

Shares representing the ownership interest in a corporation. If only one class of shares exists, it is known as common shares.

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18
Q

Do shareholders provide all the financing required by a company?

A

They rarely do

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19
Q

Who provides additional financing to companies and how much?

A

Often a significant portion, is provided by creditors

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20
Q

If funds have been borrowed, what kind of claim do shareholders have on the assets of the corporation?

A

Only residual claims

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21
Q

If a corporation was wound up (ceased operations), what would have to happen before shareholders would have any legal right to a return of the capital they invested?

A

All debts would have to be repaid

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22
Q

Once shares are issued, does the company have obligation to buy them back?

A

No, although it may choose to do so (unless it has committed to creditors not to)

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23
Q

Do debt obligations have to be repaid?

A

Debt obligations must eventually be repaid

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24
Q

Many companies pay shareholders a return on their investment on a regular basis under what 2 conditions?

A
  1. As long as they are profitable
  2. There is enough cash to cover required payments to creditors
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25
Q

What are dividends?

A

The distribution of retained earnings from a corporation to its shareholders, normally in the form of cash.

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26
Q

Can dividends take forms other than cash?

A

Yes

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27
Q

Who are dividends declared by?

A

A company’s board of directors.

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28
Q

What kind of flow does the payment of dividends result in?

A

An outflow of cash

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29
Q

Who would decide for a corporation to offer to repurchase shares that have been previously issued?

A

This decision would be made by the board of directors, and shareholders would have to agree to have the company repurchase their shares.

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30
Q

What kind of flow do share repurchases result in?

A

Any share repurchases would result in an outflow of cash

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31
Q

In addition to equity financing, what other way can corporations access funds?

A

Using debt financing, which involves borrowing money

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32
Q

Can corporations only borrow money one way?

A

No, corporations can borrow money in a variety of ways

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33
Q

The persons or companies that a corporation owes money to are called:

A

Creditors, one of the key user groups of accounting information

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34
Q

What are liabilities?

A

The debts and obligations of a business. Liabilities are claims of lenders and other creditors on the assets of a business.

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35
Q

What are the amounts owed to creditors—in the form of debt and other obligations called?

A

Liabilities, as they are a present obligation to transfer economic resources as a result of a past transaction.

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36
Q

How are different types of liabilities organized by?

A

Specific names are given to different types of liabilities, depending on their source.

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37
Q

What is it called when a company uses its operating line of credit to cover cash shortfalls and overdraws its bank account?

A

It results in a liability called bank indebtedness

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38
Q

What is bank indebtedness?

A

A short-term loan, such as an operating line of credit, pre-arranged with a bank to cover cash shortfalls.

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39
Q

Give an example of bank indebtedness.

A

A corp may have received funds from an operating line of credit with its bank (a pre-arranged bank loan for a maximum amount that allows a company to draw more money than it has on deposit in its bank account)

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40
Q

What are 2 ways corps can borrow money depending on length in time?

A

May borrow using a short-term bank loan payable (also known as a note payable) or using long-term debt.

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41
Q

What are examples of long-term debt?

A

Mortgages payable, bonds payable, finance lease obligations, and other types of debt securities borrowed for longer periods of time

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42
Q

What kind of flow does borrowing funds result in?

A

An inflow of cash from these financing activities

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43
Q

What kind of flow does the repayment of short-term or long-term debt result in?

A

An outflow of cash

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44
Q

Are the claims of creditors the same as those of a share holder?

A

No, the claims of creditors differ from those of a shareholder

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45
Q

How do the claims of creditors differ from those of shareholders?

A
  • Amount borrowed from creditor must eventually be repaid with interest
  • Agreement to a repayment schedule is made at the time of borrowing
  • A creditor has a legal right to be paid at the agreed time
46
Q

What happens in the event of a In the event of nonpayment to a creditor?

A

Creditor may force the company to sell assets to pay its debts

47
Q

What type of activitie(s) may the payment of interest on borrowed funds be treated as?

A

As a financing activity (ONLY in lecture) or as an operating activity under IFRS

48
Q

What kind of flow does the payment of interest on borrowed funds result in?

A

Outflow of cash

49
Q

What type of activitie(s) may the payment of dividends on borrowed funds be treated as?

A

As a financing activity (ONLY in lecture) or as an operating activity under IFRS

50
Q

What type of activitie(s) are the payment of interest and dividends on borrowed funds be treated as IN THE TEXTBOOK?

A

Payment of interest will be treated as an OPERATING activity, while the payment of dividends will be treated as a FINANCING activity because interest factors into the determination of net income, while dividends do not.

51
Q

What does a company do after it raises money through financing activities?

A

It then uses that money for investing activities

52
Q

What do investing activities consist of?

A

Involve the purchase (or sale) of long-lived assets that a company needs in order to operate

53
Q

What are assets?

A

The resources owned or controlled by a business that are expected to provide future economic benefits ( can be short- or long-lived).

54
Q

What type of assets do investing activities generally involve?

A

Long-lived assets

55
Q

What are examples of purchases of long-lived assets that are investing activities?

A

Purchases of long-lived assets such as furniture, equipment, computers, vehicles, buildings, and land are all examples of investing activities

56
Q

What is property, plant, and equipment?

A

Tangible assets, such as land, buildings, and equipment, with relatively long useful lives that are being used to operate the business

57
Q

What is another term for property, plant, and equipment?

A

Also known as capital assets; land, buildings, and equipment; or fixed assets

58
Q

What are 2 examples (other than PPE) of long-lived assets?

A
  1. Goodwill
  2. Intangible assets
59
Q

What is goodwill?

A

The value of favourable, unidentifiable attributes related to a company as a whole. It is calculated when one business acquires another and pays more than the fair value of the company’s net identifiable assets.

60
Q

What results in goodwill?

A

Results when a company acquires another company, paying a price that is higher than the value of the purchased company’s net identifiable assets.

61
Q

What are intangible assets?

A

Assets of a long-lived nature that do not have physical substance but represent a privilege or a right granted to, or held by, a company.

62
Q

What are examples of intangible assets?

A

Include patents, copyrights, and trademarks

63
Q

What kind of flow do investing activities result in?

A

For most companies, they normally result in an outflow of cash as companies must continuously invest in long-term assets to grow or even maintain their operations

64
Q

What can companies do when they have finished using long term assets?

A

Sell or dispose of them

65
Q

What kind of flow does the sale of long-term assets result in?

A

In an inflow of cash, though this is generally much less than the outflow of cash related to asset purchases

66
Q

What kind of investing activities can companies have in relation to the shares or debt securities of other companies?

A

The purchase (outflow) or sale (inflow) of shares or debt securities (such as bonds) of other companies

67
Q

What is the purpose of the investments relating to purchase/sale of another companies shares or debt securities?

A
  • May be related to generating returns (such as dividends or interest) in the short term
  • May be long-term strategic investments that enable the company to have a degree of influence or control over the other company
68
Q

How have people (especially students) misunderstood the term investing activities?

A

Thought the term meant “investments” only.

69
Q

What is the reality of investing activities (vs the common misperception)?

A

For most companies, the vast majority of investing activities are normally related to the purchase and sale of long-term assets, rather than investments in the shares or debt securities of other companies.

70
Q

What can a business begin once it’s raised the necessary financing and invested in the long-term assets it needs to get started?

A

Can begin its operations

71
Q

What is an example of North West’s operating activities?

A

Ex: sells food, clothing, housewares, appliances, and outdoor products in its retail locations. Also provides services to its customers: income tax preparation, cheque cashing, money transfers, and postal services

72
Q

What is income?

A

(Also known as revenue) The increase in economic benefits that result from the normal operating activities of a business, such as the sale of a product or provision of a service

73
Q

What is another term for income?

A

Revenue

74
Q

In accounting terms, where does income results from?

A

Increases in economic resources—normally an increase in an asset but sometimes a decrease in a liability—that result from the sale of a product or service in the normal course of business

75
Q

What sources of income are referred to as revenue?

A

Such as from sales or services

76
Q

What sources of income are referred to as income (rather than revenue)?

A

Such as from interest and dividends

77
Q

What is an example of revenue being identified by a different name (other than income)?

A

North West refers to the revenues it generates from the sale of goods and services as “sales.”

78
Q

How may companies earn interest income?

A

On excess cash held as investments and rental revenue from unused space

79
Q

What are the 4 sources of revenue or income that are common to many businesses?

A
  1. Sales revenue
  2. Service revenue
  3. Interest income
  4. Rent income
80
Q

When does the textbook refer to things as revenue or as income?

A
  • Revenue when recording sales of goods or services
  • Income when recording the receipt of interest, rents, dividends, and other forms of income that are not part of the entity’s principal operations
81
Q

What is an alternate term for interest income?

A

Interest revenue or finance income

82
Q

What does a company do when sales do not result in an immediate receipt of cash?

A

Instead, credit is extended to its customers. This means they will pay their accounts in the future

83
Q

What is the right to receive money in the future for sales not resulting in immediate cash called?

A

An account receivable

84
Q

What is an account receivable?

A

Amounts owed by customers who purchased products or services on credit (on account)

85
Q

Why are accounts receivables assets?

A

Because they represent an economic resource—cash—which will be received when the amounts owed are eventually collected.

86
Q

While a company’s long-lived assets, such as property, plant, and equipment, are purchased through investing activities where do other assets—typically with shorter lives—result from?

A

Operating activities, such as accounts receivable

87
Q

Other than accounts receivables, what are other types of receivables a company can have?

A

Interest receivable, rent receivable, and deferred tax assets that result from differences in how items are recorded for accounting and tax purposes

88
Q

What are supplies?

A

Consumable items used in running a business, such as office and cleaning supplies

89
Q

Are supplies a short-term or long-term asset?

A

Short-term asset used in day-to-day operations

90
Q

What are examples of things that are AND aren’t supplies?

A

Items such as office and cleaning supplies, but do not include any items that are purchased to be resold to customers

91
Q

What is inventory (or merchandise inventory)?

A

Items that are held for future sale to customers

92
Q

What happens when the goods (inventory) are sold?

A

They are no longer an asset with future benefits, but are an expense

93
Q

The cost of the inventory sold is an expense called..?

A

Cost of goods sold (COGS)

94
Q

What are expenses?

A

The decreases in economic benefits that result from the costs of assets consumed or services used in ongoing operations to generate revenue.

95
Q

How are expenses related to assets and liabilities?

A

When an expense is incurred, an asset will decrease, or a liability will increase

96
Q

How are expenses organized/categorized?

A

Identified by various names, depending on the type of asset consumed or service used

97
Q

What are the 6 main expenses that North West reports?

A
  1. Cost of goods sold (which it calls “cost of sales”)
  2. Selling
  3. Operating
  4. Administrative expenses
  5. Interest expense
  6. Income tax expense
98
Q

What are cost of goods sold?

A

The total cost of inventory sold during the period. In a perpetual inventory system, it is calculated and recorded for each sale. In a periodic inventory system, it is calculated at the end of the accounting period by deducting ending inventory from the cost of goods available for sale.

99
Q

What are operating expenses?

A

Expenses incurred in the process of earning sales revenue. They are deducted from gross profit to arrive at income from operations.

100
Q

What are North West’s selling, operating, and administrative expenses items a summary of?

A

Of individual expense accounts such as salaries, advertising, utilities, professional fees, rent, depreciation, amortization, and other costs associated with running the business.

101
Q

What is depreciation?

A

The allocation of the cost of using property and equipment

102
Q

What is amortization?

A

The allocation of the cost of intangible assets

103
Q

Give an example of how short-term liabilities result from expenses.

A
  • Company purchases inventory or supplies on credit (on account) from suppliers. Obligations to pay for these goods = accounts payable
  • Interest payable on the outstanding (unpaid) liability amounts owed to various creditors
  • Salaries payable to employees
  • Property tax payable to the municipal and/or provincial governments
  • Sales tax payable and income tax payable to the provincial and federal governments
104
Q

What are deferred tax liabilities?

A

An example of a liability. They result from differences in how items are recorded for accounting and tax purposes.

105
Q

What is the goal of every business?

A

To sell a good or service for a price that is greater than the cost of producing or purchasing the good or providing the service, plus the cost of operating the business

106
Q

Revenues should, normally, be______ than the expenses incurred to generate the revenues

A

greater

107
Q

What is net income (also known as profit or net earnings)?

A

The amount by which revenues exceed expenses.

108
Q

What is an alternate term for interest expense?

A

Finance costs

109
Q

How is net income calculated?

A

Revenues-Expenses=Net Income

110
Q

What is net loss (also known as just a loss)?

A

The amount by which expenses exceed revenues

MOS 1023 Chapter 1: The Purpose and Use of Financial Statements (6 decks)

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