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MGT220H5 Study Guide - Midterm Guide: International Accounting Standards Board, Public Company Accounting Oversight Board, Subledger

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Randolph Christopher Small
Study Guide

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CHAPTER 1: The Canadian Financial Reporting Environment
Characteristics of Accounting
Accounting identifies, measures, and communicates financial information to
various users (decision makers)
Accounting has two broad classifications:
1. Financial Accounting
2. Managerial Accounting
Accounting theory and practice have evolved and will continue to evolve to
meet changing demands and influences
1. Identification, measurement, and communication of financial information about;
2. Economic entities to;
3. Interested persons
Financial Reporting
Financial accounting results in preparation of financial reports about business
Financial reporting is used by both internal and external users
External users include such decision makers as investors, creditors, unions, and
government agencies
Managerial accounting
is used by management (internal users only)
Financial Statements and Other Means of Financial Reporting
Major financial statements include:
o Balance Sheet
o Income Statement
o Cash Flow Statement
o Statement of Retained Earnings
Note Disclosures
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Financial Reporting
Other forms of financial reporting include:
o Presidents letter
o Prospectuses
o Government reporting
o News releases
o Management forecasts
Accounting and Capital Allocation
Financial reporting aids users in the allocation of scarce resources (capital)
The accounting profession has the responsibility of measuring a companys
performance accurately, fairly, and on a timely basis
These measurements enable investors and creditors to compare the income
and assets employed by companies
Investors can then assess the relative risks and returns associated with
Capital Allocation Process
Accounting and Capital Allocation
In Canada, the primary exchange mechanisms for allocating resources are:
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o Debt and equity markets (e.g. TSX)
o Financial institutions (e.g. banks)
Sources of Capital
Accounting and Capital Allocation
An effective process of capital allocation is critical to a healthy economy
Unreliable and irrelevant information leads to poor capital allocation
Credit rating agencies use accounting to rate companies financial stability
This gives investors and creditors additional independent information
Stakeholders in Financial Reporting
Stakeholders: parties who have something at risk (stake) in the financial
reporting environment
Key stakeholders include traditional users of financial information
Broader definition of users is: anyone who prepares, relies on, reviews, audits,
or monitors financial information
Includes both internal and external parties
Key stakeholders include:
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