ACCT 351 Study Guide - Comprehensive Final Exam Guide - Accounting, Financial Statement, Retained Earnings

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20 Nov 2018
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Acct 351
Unit 1
Chapter 1:
The accounting environment includes conditions, constraints, and influences that ate social, economic,
political, and legal, all of which change over time. As a result, accounting theory and practices are always
evolving to remain relevant.
Accounting is best described by the following three essential characteristics:
1. The identification, measurement and communication of financial information
2. About economic entities
3. To interested persons
Financial accounting is the process that culminates in the preparation of financial reports that cover all
of a usiess’s atiities, these are used  oth iteral ad eteral parties. The users of theses
reports include:
Investors
Creditors
In contract managerial accounting is the process of identifying, measuring, analysing, and
communication financial information to internal decision-makers. These are used to plane, evaluate and
otrol a usiess’s operatios.
Financial statements are the principal way of communicating financial information. The more frequently
used statements are;
Statement of financial position
Statement of income/comprehensive income
Statement of cash flows
Statement of changes in equity
Accounting and capital allocation
As resources are limited, we generally try to conserve them, use them effectively and identify and
encourage efficient use of them.
In Canada, the primary exchange for allocation resources are debt and equity markets as well as
financial institutions such as banks. Providing an effective system to facilitate capital allocation is critical
to a healthy economy. Efficient capita; markets promote productivity, encourage innovation, and
provide a platform for buying and selling, and obtaining and granting credit.
Stakeholders
These are the parties that have something at risk in the financial reporting environment, such as their
salary, job, investment or reputation. Key stakeholders include:
Investors
Creditors
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Management
Securities commissions
Stock exchanges
Analysts
Credit rating agencies
Auditors
Standard setters
From the reporting perspective, a few lessons were learned:
1. Many capital markets participants act in their own self-interests to the potential harm of others
2. The amount and nature of risk is not always properly communicated to investors
3. Investors do not always understand what they are investing in
Objective of financial reporting
The objective is to provide financial information about the reporting entity that is useful to present to
potential equity investors, lenders, and other creditors in making decisions in their capacity as capital
providers.
General-purpose financial statements provide financial reporting information to a wide verity of users.
As part of the general-purpose financial reporting, and entity perspective is adopted. Companies are
viewed as separate and distinct from their owners under this perspective. A perspective that focuses
only on the needs of shareholders is referred to as proprietary perspective, this is not generally
considered an appropriate perspective.
Investors are interested in assessing:
1. The opa’s ailit to geerate et ash iflos
2. Maageet’s ailit to protet ad ehae the apital proider’s iestets
Accrual-basis accounting is a process that ensures a company records events that change its financial
statements in the periods in which the events occurs, rather than only in the periods in which it receives
or pays cash. Under this approach a company recognizes revenues when it provides the goods or
services rather than when it receives the cash.
Information asymmetry
Ideally, to facilitate the flow of capital in the most efficient and effective manner, all stakeholders should
have equal access to all relevant information. However, this theory does not always work in practice.
Management may fell that dislosure of all iforatio a hurt the opa’s opetitie adatage
or position. For this reason, perfect symmetry does not exist, rather information asymmetry exists in the
financial world.
The efficient market hypothesis proposes that market prices reflect all information about a company.
Adverse selection: means that where information asymmetry exists, the capital marketplace may attract
the wrong type of company.
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