September 25 2013 Lecture.docx

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Department
Management and Organizational Studies
Course
Management and Organizational Studies 3370A/B
Professor
Maria Ferraro
Semester
Fall

Description
September 25, 2013 MOSLecture#3 Trade-offs and Constraints  Trade-Offs o It is not always possible to have all fundamental and enhancing qualitative characteristics o Trade-offs happen when on qualitative characteristics is sacrificed for another o i.e. – if you want something quickly and efficiently, there may be estimates or missing numbers  Constraints o Materiality  If leaving including information would influence/change the judgement of a reasonable person then that information is considered material  Quantitative guidelines for materiality – professional judgement o Cost vs. benefits  Benefits of using the information should outweigh the costs of providing that information Elements of Financial Statements  Assets o Involve economic benefit to the  Liabilities o Represent a duty or responsibility o Entity is obligated and has little or no discretion to avoid the duty or responsibility o Obligation results from a past transaction or event o What we owe  Equity o Net assets o Represents residual interest in assets after all liabilities have been paid  Revenues o Increases in economic resources resulting from ordinary activities  Expenses o Decreases in economic resources resulting from ordinary revenue – generating activities  Gains o increases in equity (net assets) resulting from incidental transactions o i.e. – someone crashes into delivery van which was valued @ $10,000 in the books but the insurance claim was $20,000  Losses o Decreases in equity(net assets) resulting from incidental transaction Foundational Principles  Recognition/derecognition o Process of including an item on entity’s balance sheet or income statement o Elements of financial statements have historically been recognized when”  They meet the definition of an element (e.g. asset)  They are probable  They are reliably measurable  Derecognition o Process of removing something from the balance sheet or income statement  Economic Entity Assumption o The economic activity can be identified with a particular unit of accountability o The business activity is separate and distinct from its owners (and any other business unit) o Does not necessarily refer to a legal entity o Legal entity concept is used for tax and legal purposes o Enron  Didn’t report to public/shareholders that they had millions of dollars in debt  Control o Important factor in determining entities to be consolidated and included in the economic entity o Some concepts of control include:  Under IFRS  Having power over investee  Exposure, or rights, to variable returns from involvement with investee  Revenue Recognition Principle o Revenue is recognized when:  Risks and rewards have passed or the earnings process is substantially complete  Revenue is measurable  Revenue is collectible o Revenues are realised when products, merchandise, or assets are exchanged for cash (or claims to cash) o i.e. – somebody walks into the store and buy something o gets tricky when dealing with long term contracts  company is building a skyscraper that won’t be done for 3 years…when do you record revenue? o Matching Principle  Expenses are matched with revenues that they produce  Illustrates a “cause and effect” relationship between money spent to earn revenues and the revenues themselves  Examples o Depreciation o Bad Debt Expense o Warranty Expense o Salary Expense  Matched when our pay dates don’t tie in with the months of service Measurement o Monetary Unit Assumption  Money is the common unit of measure of economic transactions  Use of a monetary unit is relevant , simple and understandable, universally available, and useful  In Canada and Unit States, the dollar is assumed to remain relatively stable in value (effects of inflation/deflation are ignored) o Going concern Assumption  Assumption that a business enterprise will continue to operate in the foreseeable future  There is an expectation of continuing long enough to meet their objectives and commitments  Management must look out at least 12 months from balance sheet  If liquidation of the company is assumed to be likely, use liquidation accounting (at net realizable value) o Historical Cost Principle  Three basic assumptions of historical cost o Fair Value Principle  Fair value has been deined under IFRS as  The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date  Subsequent to initial recognition, historical cost and fair alue often differ  Fair value is often considered more relevant for certain assets/liabilities o Full disclosure Principle  Anything that is relevant to users decisions should be included in financial statements  Disclosure may be made  Within the main body of
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