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Management and Organizational Studies 3360A/B Study Guide - Quiz Guide: International Accounting Standards Board, Public Company Accounting Oversight Board, Ontario Securities Commission

Management and Organizational Studies
Course Code
MOS 3360A/B
Study Guide

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§ Chapter 1 Environment
Characteristics of Accounting:
1. Identifies, measures, and communicates financial information to various users
(decision makers)
-In order to compare
2. Economic entities
-Only cares how much it worth
3. Interested persons
Accounting has two classifications:
1. Financial accounting
2. Managerial accounting
Accounting theory and practice have evolved and will continue to evolve to meet
changing demands and influences (theory and practice have gap)
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)
Major financial statements include:
Statement of financial statement Balance sheet
Statement of income/comprehensive
Income statement
Statement of cash flows Cash flows statement
Statement of changes in equity Statement of retained earnings
-Note disclosures
Other forms of financial reporting: (not governed by GAAP)
-Presidents letter
-Government reporting (tax return)
-News releases (affects stock prices)
-Management forecasts
Accounting and capital allocation:
Financial reporting aids users in the allocation of scarce resources (capital)
-E.g. bankers: whether to call you a loan, increase/decrease your interest rate
The accounting profession has the responsibility of measuring a companys
performance accurately, fairly and on a timely basis
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These measurements enable investors and creditors to compare the income and assets
employed by companies
Investors can them assess the relative risks and returns associated with companies
In Canada, the primary exchange mechanisms for allocating resources are:
oDebt and equity markets (e.g. TSX)
oFinancial institutions (e.g. banks)
-banks care only about themselves, indicating in the bank statement: we put
money in the bank = credit on bank statement; we take money out = debt on
bank statement
oFor small businesses
An effective process of capital allocation is critical to a healthy economy (relevant
reliable, timely info)
Unreliable and irrelevant info leads to poor capital allocation
Credit rating agencies use accounting to rate companies financial stability
This gives investors and creditors additional independent info
Stakeholders in Financial Reporting:
Parties who have sth at risk (stake) in the financial reporting environment
Key stakeholders: traditional users of financial info
oInvestors, creditors, auditors, employees, regulators, analysts, management,
standard setters etc.
Broader definition of users: anyone who prepares, relies on, review, audits, or
monitors financial info
Includes both internal and external parties
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Investors and creditors rely on the financial statements to make decisions
Standard setters set Generally Accepted Accounting Principles (GAAP) for direction
on accounting (how we report things)
Objective of Financial Reporting:
The overall objective of financial reporting is to provide info that is decision-useful
Financial statements should provide info about:
1. The entitys economic resources and claims to those resources, and
2. Changes in those resources and claims
Resource allocation decisions are assumed to include assessment of management
stewardship (i.e. management role in maximizing shareholder value)
General-purpose financial statements are prepared for a wide variety of stakeholders
Information Asymmetry:
Ideally, all stakeholders should have equal access to all relevant info
Managers have access to more info than other stakeholders (i.e. info asymmetry)
Some reasons for info asymmetry:
oCapital markets are not fully efficient
oHuman behavior sometimes motivated by maximizing self-interest at the cost
of others
Two types of info asymmetry problems:
1. Adverse selection: knowing that there is an info asymmetry, capital markets
may attract wrong kinds of companies
2. Moral hazard: knowing that there is info asymmetry, individuals may act in
their own best interest as the expense of others (i.e. management bias)
Some of the possible motivations for management bias:
oEvaluation of management performance
oCompensation structures (Nortel Networks)
oAccess to capital markets and meeting analyst expectations
oMeeting contractual obligations
The need to Develop Standards:
Accounting standards help reduce info asymmetry problems in financial reporting
Standards are not rules, regulations or laws
Standards are intended to be generally accepted and universally practiced
The Standard Setting Process in Canada:
Canadian Accounting Standards Board (AcSB) (for Canadian national GAAP)
-Primarily responsible for setting GAAP for Canadian private enterprises
(ASPE), not-for-profit entities, and pension plans
-Two underlying premises for development of standards
Be responsive to the needs and viewpoints of the entire economic
Operate in full public view through due process
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