Management and Organizational Studies 1023A/B Chapter Notes - Chapter 2: Financial Statement, Cash Flow Statement, Accounting

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MOS Chapter 2
“a coherent system of inter-related objectives and fundamentals that can lead to consistent
standards and that prescribes the nature, function and limits of financial accounting statements”
guides decisions about what to present in financial statements
conceptual framework does the following: ensure that existing standards and practices are
clear and consistent, makes it possible to respond quickly to new issues, increases the relevance,
faithful representation, comparability and understandability of financial report results
ensures that we have a coherent set of standards
canadian standards are based mostly on general principles, not specific rules
makes financial statements more relevant, objective and easier to compare
more countries are adopting a uniform, global set of standards
International Accounting Standards Board (IASB) tries to reduces areas of difference in
Canada has standards set by the Accounting Standards Board (AcSB), created by the Canadian
Institute of Chartered Accountants
Accounting Standards Oversight Council oversees the activities of the AcSB
AcSB recommended that profit-oriented publicly traded companies in Canada move to
International Financial Report Standards by 2011
AcSB has begun a convergence strategy that will ensure Canadian standards become the same
not-for-profit companies will move to a simplified set of standards
Canadian companies whose shares trade on a US stock exchange, which currently permits a
Canadian company to use US accounting standards, are also required to change to IFRS by 2011
conceptual framework of accounting has four main sections: objective of financial reporting,
qualitative characteristics of accounting information, elements of financial statements,
recognition and measurement criteria (assumptions, principles, constraints)
to provide information that is useful to individuals who are making investment and credit
financial reporting should provide information about the amounts, timing and uncertainty of
future cash flows, economic resources and claims to those resources
should include management’s explanations about the company’s financial activities
accounting information is relevant if it will make a difference in users’ decisions
helps users make predictions about the potential effects of past, present or future transactions,
therefore said to have predictive value
helps users confirm or correct their previous expectations, therefore said to have feedback
in most cases, financial statements are expected to confirm and not correct expectations
must be timely- available to decision makers before it loses its ability to influence their
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must be a faithful representation of what really exists or happened, must represent economic
also means that financial information must be verifiable, neutral and complete
verifiability means two or more people reviewing the same information would reach the same
results or similar conclusions
must also understand financial reporting information is often based on estimates, rather tahn on
exact measures of transactions and events
neutrality- absence of bias
accounting information cannot be selected, prepared or presented to favour one set of
interested users over another
completeness means that all information that is needed to faithfully represent economic reality
must be included
there is comparability when companies with similar circumstances use the same accounting
enables users to identify the similarities and differences between companies
comparability is sometimes difficult due to different accounting methods, international
accounting standards will help eliminate some of these differences
users of accounting information also compare a company’s financial results over time
consistency means that a company uses the same accounting treatment for similar events from
year to year, therefore can be used for meaningful analysis of trends
all users have to be able to understand financial information
international accounting standards will help ensure information is more likely to be understood
by global users
financial statements cannot always satisfy the varied needs of all users
objective of financial reporting focuses mostly on the information needs of investors and
necessary to agree on a base level of understandability
base level- the average user is assumed to have a reasonable understanding of accounting
concepts and procedures, as well as of general business and economic conditions
those who do not have this level of understanding should rely on professionals
qualitative characteristics are complementary concepts- they work together
must be applied in a certain order
the qualitative characteristic of relevance should be applied first
will help identify what specific information that would affect decisions of users of accounting
information should be included in financial reports
faithful representation is then applied to ensure that economic information faithfully represents
the information being describe
next are comparability and understandability, they add to decision-usefulness of financial
reporting information
must be applied after first two characteristics because they cannot, either individually or
together, make information decision-useful if it is irrelevant or not faithfully represented
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