AFM291 – Intermediate Accounting Exam Notes

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Accounting & Financial Management
AFM 291
Mindy Wolfe

AFM291Intermediate AccountingChapter 1 The Canadian Financial Reporting EnvironmentFinancial Statements and Financial Reportingfinancial reporting culminates in the preparation of financial reports that cover business activitiesoused by both internal and external parties which includes investors creditors and stakeholdersmanagerial accounting is the process of communicating financial info to internal decisionmakerstakes varied forms and helps management plan evaluate and control organizations operationsinformation provided allows investors and creditors to compare incomeassets and assess risksreturnsocapital allocationinvestorscreditors can channel resources more effectively after assessmentsmechanisms for allocating resources include debt and equity marketsfinancial institutionsdebt and equity marketplacepublic stock marketsexchangesprivate sourcesounreliableirrelevant information leads to poor capital allocation which hurts growthaccounting influences the transfer of resources such as when credit rating agencies rate financial stabilitycompany management prepares the financial statements so has best insight into dynamics of the businessstatements are auditedreviewed by auditors who discuss with management how events communicatedoreview the information to ensure that it reflects sound accounting choicesstandard setters set generally accepted accounting principles securities commissions and stock exchanges monitor financial statements to ensure plain disclosurecredit rating agencies and analysts monitor and analyze the information produced by the companysystem provides checks and balances to ensure that people with capital make worthwhile assessmentsObjective of Financial Reportingdecisionusefulness provide financial info about entity used to help capital providers make decisionsgeneral purpose financial statements provide financial reporting information to wide variety of usersoprovide at the least cost the most useful information possible stewardship management accountable to investors for custodysafekeeping of resourcesprofit usageentity perspective where companies are viewed as separate and distinct form their owners shareholdersproprietary perspective financial reporting should be focused only on the needs of shareholdersinvestors are interested in assessing ability to generate net cash inflowsability to enhance investmentsoneed to understand economic resources of an enterprise claims and the changes in themhowever users have different needs and levels of knowledgeinformation based on accrual method better indicates presentfuture ability to generate positive cash flowsensures that company records events that changes its financial statements in periods in which event occursrecognizes revenues when it provides goods or services than when it receives cashvice versa for expensesInformation Asymmetryto facilitate flow of capital all stakeholders should have equal access to all relevant informationoinformation asymmetry results since management has access to more information than otherscould interfere with a companys ability to access capital andor minimize cost of capitalcapital markets eg stock exchanges are not necessarily fully efficient since not all info in stock pricesprices may reflect hidden or insider information because people want to maximize own wellbringefficient markets hypothesis proposes that market prices reflect all information about the companyadverse selection capital marketplace may attract the wrong type of company ie those most to gain from not disclosing informationhonest ones may choose not to enter marketplace due to discounted pricesmoral hazard people will often shirk their responsibilities if they think that no one is watchingomanagement bias exists when managers downplay negativefocus on the positive of performanceoaggressive accountingoverstating assets and understating liabilitiesselective disclosuresconservative accounting has the opposite effectmotivation to bias information evaluation of management performance ie how well management has discharged stewardship functioncompensation structures ie management remuneration may be based on financial statements directlyoaccess to capital markets is dependent on meeting financial analysts expectationscontractual obligations ie lending contracts require that financial benchmarks are met ooften relate to financial stability or liquidity such as a debt covenant for minimum financial ratiosStandard Settingcommon set of procedures and standards is called generally accepted accounting principles GAAPoeither an authoritative rulemaking body has created a reporting principle in a particular area oor over time a specific practice has been accepted as appropriate since used universally the International Accounting Standards Boards will develop standards for public companies from 2011public companies operate globally and raise funds in global capital markets so want common languageprivate companies often operate locally have less complex business models fewer users close to firmoneeds to have separate GAAP that is less complicated fewer disclosures geared toward fewer usersdiscussion papers are often the predecessors of exposure drafts owhen IFRS are being formulated the IASB may issue a DP and ask for comment letters by the time the proposed standard gets to the ED stage many key decisions already madeaccounting professionals have often relied on more prescriptive specific guidance provided in US GAAPoin addition to be listed on US exchange the companies must follow US GAAP or IFRS Canadian Accounting primary responsibility for setting GAAP in Canadaproducing CICA Standards Boardhandbookfacilitates capital allocation process in businessNFP sectors through improved infocollaborates with others to develop high quality internationally accepted standardssupports implementation of financial reporting standardsresolution of issuesorespond to needsviewpoints of the entire economic community ooperate in full public view through a due process system allows interested persons opportunity to make views knownofrom 2011 AcSB develops standards for private NFP pension plans onlyAccounting Standards oversees AcSB activities by providing input and reporting to the public Oversight CouncilInternational the International Accounting Standards Committee formed in 1973Accounting Standards owork generally to improve and harmonize regulationsproceduresBoardolessen the areas of difference among countries own standardsin 2001 the International Accounting Standards Board was createdodevelop single set of high quality globally accepted IFRS through the IASBopromote the use and rigorous application of those standardsotake account of financial reporting needs of emerging economies
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