Intermediate Accounting Part 1 : Notes

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Accounting & Financial Management
AFM 291
Mindy Wolfe

Chapter 1: The Canadian Financial Reporting Environment  Accounting is the identification , measurement and communication of financial information about economic entities to interested parties  Financial Accounting reports business activities to both internal and external users  Management Accounting communicates financial info to internal users only  Accountants have the role of measuring company performance , providing good information that is relevant , reliable and timely therefore improves capital allocation leading to more investing  Stakeholders are anyone who prepares, relies, reviews, audits and monitors financial info , in essence anyone who is affected by this info is some way or other  Management Bias , aggressive accounting done by overstating or understating info in order to make the firm look stronger in the eyes of shareholders  GAAPS help reduce management bias ( the need to skew numbers or info in order to meet analysts’ forecast, or to earn bonuses)  The objective of financial accounting is to provide info that is useful to users and relevant in decision making  Management Stewardship , the role of management maximizing shareholder value  Standards were needed due to conflicting and coinciding needs, not all users have the need or level of knowledge , as well as to decrease management bias  Canadian Accounting Standards Board , sets GAAPS and CICA handbook , deals with standards for public , private and nonprofit entities but now due to IFRS they only set the standards for the private , not for profit entities and the pension plans  The International Accounting Standards Board , sets the global standards for public or highly complex private entities  Financial accounting Standards Board, US major standards setting board, no final authority over standards this is therefore the role of the Securities Exchange Commission  If a company is listed on US stock exchange you must comply with US GAAP or IFRS  Provincial Securities Commission, oversees and monitors the marketplace ensuring it is fair  GAAPS are principles that are general not specific rules therefore professional judgment and the conceptual framework must be used  Sarbanes Oxley act , created to fight fraud and poor reporting practices by improving auditor independence rules and materiality guidelines  Public Company Accounting Oversight Board, oversees auditor s of public companies ( auditors of the auditors ) Chapter 2: The Conceptual Framework  The conceptual framework is a system of objectives and fundamentals that are interrelated and used to create standards , also used to increase the understanding of financial statements , enhance the comparability of F/S and solve new problems  The conceptual framework consists of three levels , the why , what and how  The Why ; is the first level and it explains the goals and purposes of accounting  The What ; is the second level and it contains the elements and the qualitative characteristics of financial info  The How; is the third level and it contains the foundational principles used to set standards  Level 1 – The objective of accounting is to communicate useful info to users ( investors , creditors , analysts , managers and securities commissions) in order to make their resource allocation decisions  Level 2 – The Qualitative Characteristics ; the most fundamental are that the information be relevant ( as in capable of making a difference in decision making , has predictive value and confirmatory value ) The information must also have representational faithfulness (reflecting the economic substance of the transaction, being complete, transparent, neutral and free of material bias)  We also have Enhancing Qualitative Characteristics being; comparability , verifiability, timeliness , understandability  Elements of F/S , Assets involve present economic resources capable of producing cash flows, entity has the right or access to these resources ( ownership ) , Liabilities present an economic obligation , and are also enforceable / callable , Equity are net assets which are residual interest , Revenue the increase in economic resources by ordinary activities, Expenses are decreases in economic resources resulting by revenue generating activities , Both gain and losses result from incidental transactions  Level 3 : Foundational Principles these principles help explain which, when and how financial elements should be recognized , measured and presented on the financial statements  Revenue Recognition Principle , in order to record revenue ; the risks and rewards have to have been substantially complete, measurability is certain , and collectability is assured  Matching Principle , matching the costs with the revenues that they produce within that same period  Periodicity assumption , the activities of a business can be divided into artificial time periods  Monetary Unit Assumption , money / dollars is the measurement used  Going Concern Assumption , the assumption that the business will continue to operate in the foreseeable future  Historical Cost Principle , transactions are measured at the amount of cash that was paid or received at the time the transaction took place , for this to happen there must be ; a value that represents a point in time, also a reciprocal exchange and all dealing with an outside party  Fair Value Principle , the price that would be received to sell an asset or paid to transfer a liability between market participants at the measurement date , in accordance with IFRS  Full Disclosure Principle - anything that is relevant to decision making should be included in the financial statements. Chapter 7: Cash  a financial asset - cash, a right to receive cash or a physical asset from another party , an equity instrument of another entity , or a contractual right to exchange financial instruments with another party  cash – cashier’s cheques , bank drafts , money orders are also viewed as cash they are the most liquid current asset  Cash equivalents and short term investments are also current assets some examples are certificate of deposits , and short term paper , an asset that will be used to meet current operating expenses and to liquidate current liabilities will be classified as a current asset  How to record / report cash and other current assets on the balance sheet  Reporting restricted cash : petty cash , dividend bank accounts basically any amount of cash that has been restricted or set aside for a specific purpose, usually this amount is not material enough to be classified separately from cash , but if it is material then we need to separate it and report it in the current asset or long term assets depending on the availability of this cash  Compensating balances – are required by some banks in order to receive a loan , they are an amount of cash that is always required to be in your bank account in order to receive credit, this amount must be reported separately from cash , so as not to mislead investors ( usually done as a note disclosure )  Cash in foreign currencies - if there are no restrictions on the foreign amount of cash , it is then reported on the balance sheet at the exchange rate of the date the statement is created , under cash , if there are restrictions of the flow of capital out of the country then the cash is reported as restricted  Bank overdrafts- when a cheque is written for more than the amount in the bank account , this is reported under current liabilities usually done by adding this amount to accounts payable , do not offset the overdraft with the cash account  Cash equivalents- defined as short term investments that can be readily converted to cash ( maturity of three months or less qualify as short term investments) , they are reported at fair value , short term investments are reported at amortized cost ( which estimates fair value )  Types of Receivables  There are four types of receivables : trade receivables, notes receivables, loans receivables, non trade receivables  Trade receivables : amount owed by customers to company for good and services sold can be an open a/r or notes receivable , an open a/r is one with no contract and only an oral promise to pay back the credit granted in 30to 60 days , while a notes receivable is a written promise to pay a certain amount of money on a specified future date ( could arise due to sal
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