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Chapter 1

Chapter 1 – The Canadian Financial Reporting Environment.docx

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Financial Accounting
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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 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  In Canada, 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 i
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