Textbook Notes (290,000)
CA (170,000)
UTSG (10,000)
Chapter 1

RSM220H1 Chapter Notes - Chapter 1: Financial Accounting, Information Asymmetry, Capital Market

Rotman Commerce
Course Code
Dragan Stojanovic

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Chapter 1: The Canadian Financial Reporting Environment
Lecture 1
Financial Statements and Financial Reporting
Accounting: identification, measurement and communication of financial information about economic entities to
interested persons
Financial accounting: 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: process of identifying, measuring, analyzing, and communicating financial information to
internal decision makers
Accounting and Capital Allocation
Efficient use of resources increase our standard of living
Accounting professions measure company performance on accurate, fair, timely basis
Effective capital markets promote productivity, encourage innovation, provide a platform for buying and selling
securities and obtaining and granting credit
Unreliable and irrelevant information leads to poor capital allocation which hurts securities markets and economic
Credit rating agencies give investors and creditors independent information to use when making decisions
Stakeholders: parties who have something at risk in the financial reporting environment
Key stakeholders i.e. traditional users
Users: anyone who prepares, relies on, reviews, audits or monitors financial information i.e. investors, creditors,
analysts, managers, employees, customers etc
Securities commissions and stock exchanges monitor the financial statements to ensure full and plain disclosure
of material information and to determine whether companies can continue to list their shares on stock exchanges
Problem with subprime mortgages: lent money to people not credit worthy, interest rates were too low, when
interest rates increased, borrower could not afford it, investors in SPE (special purpose entity) did not understand
Objective of Financial Reporting
Objective of general purpose financial reporting: to provide info about reporting entity that is useful to present
and potential equity investors, lenders and other creditors in making decisions in their capacity as capital
Stewardship: management is accountable to investors for the custody and safekeeping of the company’s economic
resources and for their efficient and profitable use
Entity perspective: when companies are viewed as separate and distinct from their owners
Proprietary perspective: inappropriate perspective that focuses only on the needs of shareholders
Investors are interested in assessing: 1) the company’s ability to generate net cash flows
2) Management’s ability to protect and enhance the capital
providers investment
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