MOS 1023 Jan 23

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Western University
Management and Organizational Studies
Management and Organizational Studies 1023A/B
Maria Ferraro

Jan 23 – Financial Statements – Framework, Presentation and Usage The Need for a Conceptual Framework – To develop a coherent set of standards and principles – To solve new and emerging practical problems. – Framework provides investors and creditors information to make comparisons with other companies Conceptual Framework of Accounting Objective of Financial Reporting – Committee formed to determine what the objectives are What is useful to them? The ability to assess the amount, time and certainty of future cash flow. Qualitative Characteristics – Predictive value: ability to decipher future cash values – Substance over form: Look at substance of transaction and determine if it's an asset, liability etc. eg. Apartment Rent Payment Cr Cash $1000 eg. Lease: Photocopier Equipment – Asset goes up Cr - Payable Substance over form – Look at the true substance of the economic situation – not what it says Enhancing Qualitative Characteristics Comparability: the more estimates, the less reliable it tends to be – If you change something, it must be because it provides better information Verifiability: Estimates required. Would another professional person come to the same conclusion? Consensus. Understandability: whether an investor who is reasonably informed can comprehend the information Tradeoffs and Constraints Tradeoffs: giving up one characteristic over the other eg. Being timely, giving up some completeness Cost vs. Benefits: eg. The cost of giving information, rounding money up. Elements of Financial Statements 1. Assets have two key characteristics: – Involve a present economic resource: will get a future benefit from it – Entity: has a right or access: restriction of use to other parties 2. Liabilities: – Economic obligation or burden – Present obligation 3. Equity (net assets): if a company doesn't do well, their liabili
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