CHAPTER 1 TEXTBOOK REVIEW A six page summary of the entire first chapter of the RSM220 Textbook (Intermediate Accounting)

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University of Toronto St. George
Rotman Commerce
Dragan Stojanovic

CHAPTER ONE THE CANADIAN FINANCIAL REPORTING ENVIRONMENTAccounting largely a part of its environment accounting theory and practice have always evolved and will continue to evolveAccounting identification measurement and communication of financial information about economic entities to interested personsFinancial accountingfinancial reportingthe process that culminates in the preparation of financial reports that cover all of the enterprises business activities 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 makersFinancial statements principal way of communicating financial information to those who are outside an enterprise they give the firms history quantified in terms of moneyo1 balance sheet 2 income statement 3 statement of cash flows f statement of owners or shareholders equitystatement of retained earningsMarkets free enterprise and competition determine whether a business will succeed and thriveAccounting profession responsibility of measuring company performance accurately fairly and timelyInformation 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 opportunitiesoCreditorsinvestors can then channel their resources based on these assessmentsIn Canada primary exchange mechanisms for allocating resources are debt equity markets and financial institutions banksDebt and equity marketplace includes both stock marketsexchanges and private sourcesAn effective process of capital allocation is critical to a healthy economypromotes productivity encourages innovation and provides an efficient and liquid market for buying and selling securities and obtaininggranting creditUnreliableirrelevant informationleads to poor capital allocationnegative impact on securities markets and economic growthThe accounting reports affect the transfer of resources among companies and individualsStock pricesrise when positive news is expectedreleasedCredit rating agenciesuse accounting and other information to rate companies financial stabilityGives investorscreditors additional independent information to use when making decisionsStakeholdersparties who have something at risk in the financial reporting environment Key stakeholders in the financial reporting environment includeof financial traditional usersinformation as well as othersUsersmay be more broadly defined to include not only parties who are relying directly on the financial information for resource allocation ie investorscreditors but also others who help in the efficient allocation of resources such as financial analystsregulatorsUsers broader definition anyone who prepares relies on reviews audits or monitors financial informationCompany management prepares the financial statementshas best insight into the business and therefore knows what should be included in the financial statementsStatements are then audited and reviewed by auditorsmay discuss with management how economic eventstransactions have been communicated in the financial statementsInvestorscreditors rely on the financial statements to make decisions GAAP Generally Accepted Accounting Principlesused to prepare financial statementsoReduces management biasproviding direction as to how events should be accounting forSecurities commissions and stock exchangesmonitor the financial statements to ensure fullplain disclosure of material information and to determine whether the companies may continue to list their shares on stock exchanges
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