BU387 Lecture 1: BU387- W1, L1
BU387- CHAPTER 1
Financial Statements and Financial Reporting- Intro
• Accounting is largely a product of its environment- includes constraints, conditions,
rules, regulations, and influences that can be social, economic, political, etc.
• Accounting landscape has changed drastically over the last little bit, because of:
o Business failures (Enron, Arthur Andersen)
o Capital market failures (subprime lending crisis)
o Near bankruptcies of several countries (Greece)
o Globalization of financial reporting standards
o More sophisticated technology, and thus increasing access to information
• Financial Accounting- process that culminates in the preparation of financial reports
oeig all of a usiess’ atiities. Uses of these epots ilude iestos,
creditors, and others.
• Managerial Accounting- process of identifying, measuring, analyzing, and
communicating financial information to internal decision makers. Examples could
include cost-benefit analysis, forecasts, budgets, etc.
• Common Financial statements
o Statement of financial position
o Statement of income/comprehensive income
o Statement of cash flows, and
o Statement of changes in equity
• Note disclosures- capture some relevant information not captured in financial
statements- include prospectuses, reports, Pesidet’s lette, es eleases, et.
Accounting & Capital Allocation
• Objective 1: Explain how accounting makes it possible to use scarce resources more
efficiently
o Since our resources are limited, we try to conserve them, use them
effectively and identify and encourage those who can achieve that
o Through an efficient use of resources, our standard of living increases
• Information provided by Accounting enables investors and creditors to measure and
compare income vs assets of a company and assess relative risks vs returns
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Capital Allocation
Sources of capital
• In Canada, the primary exchange mechanisms of allocating resources are debt and
equity markets, as well as financial institutions such as banks
• Effective capital allocation is critical- efficient capital markets promote productivity,
encourage innovation, and provide a platform for buying and selling securities and
obtaining/granting credit
• Stock prices generally rises when positive news is unexpectedly released while credit
rating agenies use aoutig ifoatio to ate a opa’s fiaial stailit
Stakeholders
• Objective #2- Eplai the eaig of stakeholde ad idetif ke stakeholdes i
financial reporting, explaining what is at stake for each one
• Stakeholders are parties who have something at risk in the financial reporting
environment- their salary, job, reputation, or investment.
• Users may be broadly defined to include not only parties relying on the financial
information for resource allocation (investors/creditors) but also those who help in
the efficient allocation of resources themselves (analysts/regulators)
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• Broader definition of users includes anyone who prepares, relies on, reviews, audits,
or monitors financial information
o Includes investors, creditors, analysts, managers, employees, customers,
suppliers, unions, government departments, the general public, as well as
lawyers, auditors, and others
• Various stakeholders have specific functions in the FR environment- management
pepaes the fiaial stateet, ad theefoe ko hat’s to e iluded
o Statements are then audited by auditors who may discuss with management
how economic events and transactions have been communicated in the
financial statements
o Auditors act on behalf of shareholders to ensure management is accounting
all transactions properly- also review information to ensure it reflects sound
accounting choices
• Standard setters set GAAP (generally accepted accounting principles). Securities
commissions and stock exchanges monitor financial statements to ensure full
disclosure of information and to determine whether companies may continue to stay
on stock exchanges
• Credit rating agencies monitor and analyze information provided by the company to
see changing patterns- improved or weakened financial position
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Document Summary
Use(cid:396)s of these (cid:396)epo(cid:396)ts i(cid:374)(cid:272)lude i(cid:374)(cid:448)esto(cid:396)s, creditors, and others: managerial accounting- process of identifying, measuring, analyzing, and communicating financial information to internal decision makers. Information provided by accounting enables investors and creditors to measure and compare income vs assets of a company and assess relative risks vs returns. I(cid:374)(cid:448)esto(cid:396)s a(cid:374)d (cid:272)(cid:396)edito(cid:396)s ha(cid:448)e (cid:272)lai(cid:373)s o(cid:374) a (cid:272)o(cid:373)pa(cid:374)(cid:455)"s assets in form of equity/liability claims: proprietary perspective- idea that fr should be focused only on needs of shareholders- is(cid:374)"t (cid:272)o(cid:374)side(cid:396)ed app(cid:396)op(cid:396)iate. In order to make these assumptions, investors must understand the economic resources of a company, its claims to resources, and the changes: financial statements should be a primary source of that information. Example: a pharma company manager may not disclose negative information about ongoing drug trials as it may lower share price, and thus bonuses: the manager may even engage in greater risk-taking (management bias)
