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Chapter 1

MGT220H5 Chapter 1: Chapter 1 (The Canadian Financial Reporting Environment) - MGT220 (2018)

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Christopher Small

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Prof. Small MGT220
Chapter 1 The Canadian Financial Reporting Environment
Chapter 1 The Canadian Financial
Reporting Environment
What is theTSX Private Markets’?
Launched in 2014 by the TMX group (which operates the Toronto Stock Exchange), the TSX Private
Markets allows companies to trade securities in the exempt market. This means these companies,
called private issuers, are exempt from the requirements to file a prospectus.
For companies that want to remain private, this allows them to acquire capital and liquidity without
having to sell shares.
What is a Prospectus?
A document disclosing financial & other business information.
Why has the accounting landscape changed in the past 2 decades?
o Spectacular business failures (ex: WorldCom Inc., Enron, Arthur Andersen).
o Capital market failures (ex: The Great Recession of 2007-09 caused by subprime lending and bank failures).
o Near bankruptcies of several countries (ex: Iceland, Ecuador, Venezuela, Libya, etc.).
o Globalization of capital & other markets.
o Globalization of financial reporting standards.
o Increasing use of more sophisticated technology.
o Increasing access to information.
What’s the definition of Accounting? 3 Parts
Accounting is (1) the identification, measurement, and communication of financial information (2)
about economic entities (3) to interested persons. There are 2 types of accounting.
What is Financial Accounting?
The process that culminates in the preparation of financial reports that cover all business activities &
that are used by internal & external parties. Users include investors, creditors & others.
There are 4 Principal Financial Statements:
o Statement of Financial Position (Balance Sheet)
o Statement of Income/Comprehensive Income (Income Statement)
o Statement of Cash Flows (Cash Flow Statement)
o Statement of Changes in Equity (Statement of Retained Earnings)
There are also note disclosures that can be part of any of these statements. They are for information
that can’t be expressed in the financial statements or is better expressed through other means.
What is Managerial Accounting?
The process of identifying, measuring, analyzing & communicating financial information to internal
decision-makers. This information comes in many forms (ex: cost-benefit analyses, forecasts, etc.).
What do Accountants do? 3 Parts
Accountants have the responsibility to measure company performance accurately & fairly on a
timely basis. Accountants need to provide information to users that allows for comparison between
businesses, and thus assess the relative risks & returns of different investment opportunities.
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Prof. Small MGT220
Chapter 1 The Canadian Financial Reporting Environment
What is the Capital Allocation Process?
Providing an effective system to facilitate capital allocation is critical to a healthy economy.
Unreliable and irrelevant information leads to poor capital allocation.
In Canada, the primary exchange mechanism for allocating resources are debt & equity markets
(public stock markets/exchanges & private sources like family) and financial institutions (banks).
What are Stakeholders?
Stakeholders are parties who have something at risk in the financial reporting environment, such as
their salary, job, investment, or reputation.
Who are Users?
Users are stakeholders who use financial information. Its anyone who prepares, relies on, reviews,
audits, or monitors financial information. Includes investors, creditors, analysts, managers, unions,
employees, customers, suppliers, industry groups, government departments & ministers, the public
(ex: consumer groups), regulatory agencies, other companies, standard setters, auditors, lawyers, etc.
o Company Management: Prepares financial statement & has best insight into business.
o Auditors: Discuss info communicated by management, review info on behalf of shareholders to ensure accuracy.
o Investors & Creditors: Rely on financial statements.
o Standard Setters: Set generally accepted accounting principles (GAAPs).
o Security Commissions & Stock Exchanges: Monitor financial statements to ensure accurate disclosure and
to determine whether the business may continue to list their shares on stock exchanges.
o Credit Rating Agencies & Analysts: Monitor & analyze financial information, to look for signs of change in
financial status of a company.
What did the 2007-09 Great Recession teach us?
o Many capital market participants act in their own self-interest to the potential harm of others.
o The amount & nature of risk are not always properly communicated to investors.
o Investors don’t always understand what they’re investing in.
What is the objective of financial reporting?
To provide financial information that is useful to equity investors, lenders & other creditors in
making decisions in their capacity as capital providers. This is referred to as the decision-usefulness
approach to financial reporting.
An entity-perspective is taken, instead of a proprietary perspective. Companies are viewed as
separate from their owners (and their assets, liabilities, etc.).
What are the 2 things investors are interested in?
o Company’s ability to generate net cash inflows.
o Management’s ability to protect & enhance the capital providersinvestments.
What is Accrual-Basis Accounting?
When a company records events that change its statements in the periods in which they occur, rather
than in the periods in which it receives or pays cash. Simply, it recognizes revenue when product is
delivered, and recognizes expenses when theyre incurred (rather than when money is received/paid).
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