Textbook Notes (368,775)
Canada (162,159)
MGAC01H3 (34)
Daga (20)
Chapter 1

Chapter 1 Notes

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Financial Accounting

Chapter 1 The Canadian Financial Reporting Environment Notes Role of Financial Reporting • accounting theory and practice have always evolved and will continue to evolve • accounting is defined best by describing its 3 essential characteristics—it is the (1) identification, measurement, and communication of financial information about (2) economic entities to (3) interested persons Financial Statements and Financial Reporting • financial accounting (financial reporting) is the process that culminates in the preparation of financial reports that cover all the enterprise’s business activities and that are used by both internal and external parties • managerial accounting is the process of identifying, measuring, and analyzing, and communicating financial information to internal decision-makers, which takes varied forms, such as cost-benefit analyses and forecasts that management uses • financial statements are the principal way of communicating financial information to those who are outside an enterprise • the most frequently provided financial statements are (1) the balance sheet, (2) the income statement, (3) the statement of cash flows, and (4) the statement of owners’ or shareholders’ equity or statement of retained earnings Accounting and Capital Allocation • because resources are limited, people try to conserve them, use them effectively, and identify and encourage those who an make efficient use of them, which increases our standard of living • accounting profession has highly important responsibility of measuring company performance accurately and fairly on a timely basis • the information provided by accounting enables investors and creditors to compare the income and assets of companies and thus assess the relative risks and returns of different investment opportunities • the primary exchange mechanisms for allocating resources are debt and equity markets, as well as financial institutions such as banks • an effective process of capital allocation is critical to a healthy economy as this promotes productivity, encourages innovation, and provides an efficient and liquid market for buying and selling securities and obtaining and granting credit Stakeholders • stakeholders are parties who have something at risk in financial reporting environment, e.g., salary, job, investment, or reputation • the broader definition of users includes anyone who prepares, relies on, reviews, audits, or monitors financial information; it includes investors, creditors, analysts, managers, employees, customers, suppliers, industry groups, unions, government departments and ministers, the public in general, regulatory agencies, other companies, and standard setters, as well as auditors, lawyers, and others Objective of Financial Reporting • the overall objective is to provide financial information that is useful to users (primarily capital providers such as investors and lenders) and that is decision relevant (i.e., will help them make decisions about allocating capital) • statements should communicate info about: (1) entity’s economic resources and claims and (2) changes in resources and claims • the assessment of management stewardship is also important since users need to know whether management is doing their job Management Bias • there are many reasons why financial statements might be affected by management bias • these include the fact that the statements give information to users about management stewardship, and the fact that managers are often compensated (i.e., paid) based on the company’s net income or share value • there is also a strong desire to meet financial analysts’ expectations as this affects a company’s access to capital markets • another cause is management’s desire to comply with contracts that the company has Users’ Needs • the objective of financial reporting is to provide useful information to users • providing information that is useful to users is a challenging task since they have different needs and levels of knowledge • meeting all user needs is made more challenging when linked with the potential for management bias • generally accepted accounting principles assume that users have a reasonable knowledge of business and accounting Challenges Facing Financial Reporting Impact of Technology • as technology continues to advance at a dramatic pace, giving users greater access to more and more information more and more rapidly, the requirement for information that is more timely than annual and quarterly financial statements will rise sharply • from the company’s perspective, providing info over the Internet gives the company access to a much larger group of users Changing Nature of the Economy • the knowledge-based companies that are beginning to dominate capital markets need more relevant models for measuring and reporting value in order to evaluate assets that are currently not recognized on the balance sheet Increased Requirement for Accountability • growing number of institutional investors, partly because more and more capital is being inves
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