Chapter 1 – The Canadian Financial Reporting Environment
Financial Statements and Financial Reporting
• Accounting – (1) the identification, measurement, and communication of financial information
(2) about economic entities (3) to interested persons
• Financial accounting – the process that ends in the preparation of financial reports that cover all
of the company’s business activities and that are used by both internal and external parties
• Managerial accounting – process of identifying, measuring, and communicating financial
information to internal decision makers
• Financial statements – a way of communicating financial information to those who are outside
an enterprise
o Balance sheet – “snapshot” of the business
o Income statement – rev/exp/gain/loss
o Cash flow statement – cash inflows/outflows
o Statement of returned earnings – (ASPE)
o Statement of shareholder’s equity – (IFRS)
o Note disclosures – e.g. president’s letter and supplementary schedules in the corporate
annual report, news release, management forecast
Stakeholders
• Investors and creditors rely on the financial statements to make decisions
• Standard setters set Generally Accepted Accounting Principles (GAAP)
Stakeholder What is at stake?
Investors/creditors Investment/loan
Management Job, bonus, reputation, salary increase, access to
capital markets by company
Securities commissions and stock exchanges Reputation, effective and efficient capital
marketplace
Analysts and credit rating agencies Reputation, profits
Auditors Reputation, profits (companies are their clients)
Standard Setters Reputation
Others Various
Objective of Financial Reporting
• Objective of financial reporting is to provide financial information that is useful to users and that
is decision relevant
• Accrual basis accounting – company records events that change its financial statements when
the event occurs, rather than only in the periods in which it receives or pays cash
Information Asymmetry
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