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The Objectives of Financial Reporting.docx

3 Pages

Course Code
ACC 110
Brad Mac Master

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The Objectives of Financial Reporting *Providing relevant information to stakeholders Managers’ choices are influenced by: - the information needs of stakeholders - information given on financial statements - personal interests *Stakeholders Perspective* ① Tax Minimization - a taxpayer works within the tax laws to defer taxes or pay as little as possible ② Stewardship - responsibility for someone else’s resources - stewardship objectives is satisfied when reports to stakeholders inform them about how the resources are managed ③ Management Evaluation - evaluating the performance of an entity’s managers - separates effects of management decisions and other factors ④ Performance Evaluation - captures overall performance of an entity - reasons include shareholders assessing whether to invest, invest more or withdraw investment - charities could evaluate if the money is spent on the cause ⑤ Cash Flow Prediction - knowledge of future cash flow can help a lender evaluate a borrower’s ability to pay back the interest and principal on a loan, and other situations - explicit in IFRS ⑥ Monitoring Contract Compliance - contracts require entities to meet certain terms or conditions - contracts include covenants that restrict the behaviour of an entity - when contract terms are based on numbers, the F/S serve as tools for monitoring the entity’s compliance to the contract *Management Perspective* ⑦ Earnings Management - managers can use the flexibility in accounting to try and influence the decisions of stakeholders or affect economic consequences to different stakeholders a) Managing Earnings to Reduce Income - good strategy when looking for government support or subsidies - helps with outcome of labour negotiations and getting workers to accept lower wages - tax minimization - politicians and citizens pressuring entities who “make too much” How is it done? - revenue is recognized late in the earnings cycle and expenses recognized early - A big bath is when an entity expenses a significant amount of assets in the current period that normally would have been depreciated or otherwise expensed in future periods - not-for-profit organizations benefit from this setup b) Managing Earnings to Increase Income - managers try to influence the stock price of a public company. Higher earnings has a positive effect on stock price - managers want to increase the selling price of their company - managers want to increase the likelihood of receiving a loan. This includes improved financial ratios which influences lenders in terms of risk assessment - improves the perception that stakeholders have of the company which could influence their actions - managers can get higher bonuses based on higher net income - managers want to ensure no term or contractual agreement are violated c) Managing Earnings to Smooth Income - making income look smooth will make stakeholders believe there is less of a risky investment ⑧ Minimum Compliance - managers provide the minimum amount of information necessary to comply with reporting
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