MGAC01H3 Chapter Notes - Chapter 1: Special Purpose Entity, Balanced Scorecard, Financial Statement

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Published on 13 Jun 2012
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Chapter 1 The Canadian Financial
Reporting Environment
Learning Objectives:
1. Describe the essential characteristics of accounting
The essential characteristics of accounting are the (1) identification, measurement, and
communication of financial information about (2) economic entities to (3) interested
persons
2. Explain how accounting makes it possible to use scarce resources more efficiently
Accounting provides reliable, relevant, and timely information to managers, investors,
and creditors so that resources are allocated to the most efficient enterprises.
Accounting also provides measurements of efficiency (profitability) and financial
soundness
3. Explain the meaning of “stakeholder” and identify key stakeholders in financial reporting
including what is at stake for each one
Investors, creditors, management securities commissions, stock exchanges, analysts,
credit ratings agencies, auditors, and standard setters are some of the major
stakeholders
4. Identify the objective of financial reporting
The objective of financial statements is to communicate information that is useful to key
decision-makers such as investors and creditors in making resource allocation decisions
(including assessing management stewardship) about the resources and claims to
resources of an entity and how these are changing
5. Explain the notion of management bias in financial reporting
Management bias implies that the financial statements are not neutral: in other words,
the preparers of the financial information are presenting the information in a manner
that may overemphasize the positive and underemphasize the negative
6. Understand the importance of user needs in the financial reporting process
The financial reporting process is based on ensuring that users receive information that
is relevant to decisions. This is a challenge as different users have different knowledge
levels and needs. Management bias can make financial information less useful
7. Explain the need for accounting standards
The accounting profession has tried to develop a set of standards that is generally
accepted and universally practised. Without this set of standards, each enterprise would
have to develop its own standards, and readers of financial statements would have to
become familiar with every company’s particular accounting and reporting practices. As
a result, it would be almost impossible to prepare statements that could be compared
8. Identify the major entities that influence the standard-setting process and explain how they
influence financial reporting
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9. Explain the meaning of generally accepted accounting principles (GAAP)
Principles that have substantial authoritative support or those arrived at through the
use of professional judgement and the conceptual framework
10. Explain the significance of professional judgement in applying GAAP
Since most of GAAP is based on general principles, professional judgement is used for
interpretations
11. Understand the issue related to ethics and financial accounting
Accountants should note moral considerations and to make ethical decisions. Doing this
is difficult as there is no consensus as to what constitutes a comprehensive ethical
system
12. Identify some of the challenges facing accounting
Globalization requirement for international harmonization of standards
Move to new economy measuring non-traditional assets, new measurements and
reporting models that look at business reporting as a whole
Role of financial reporting
Accounting is defined best by describing its three essential characteristics:
1. Identification, measurement, and communication of financial information
2. Economic entities
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 of the enterprise’s business activities and that are used by both
internal and external parties
Managerial accounting is the process of identifying, measuring, analyzing, and communicating
financial information to internal decision-makers (i.e. cost-benefit analyses)
Common financial statements include: balance sheet, income statement, statement of cash
flows, and the statement of owners’ or shareholders’ equity
*note disclosures are also part of financial statements*
Accounting and capital allocation
Capital allocation process
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Document Summary

Learning objectives: describe the essential characteristics of accounting. The essential characteristics of accounting are the (1) identification, measurement, and communication of financial information about (2) economic entities to (3) interested persons: explain how accounting makes it possible to use scarce resources more efficiently. Accounting provides reliable, relevant, and timely information to managers, investors, and creditors so that resources are allocated to the most efficient enterprises. Accounting also provides measurements of efficiency (profitability) and financial soundness: explain the meaning of stakeholder and identify key stakeholders in financial reporting including what is at stake for each one. Investors, creditors, management securities commissions, stock exchanges, analysts, credit ratings agencies, auditors, and standard setters are some of the major stakeholders. The financial reporting process is based on ensuring that users receive information that is relevant to decisions. This is a challenge as different users have different knowledge levels and needs. Management bias can make financial information less useful: explain the need for accounting standards.

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