Textbook Notes (270,000)
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Chapter 2

Management and Organizational Studies 1023A/B Chapter Notes - Chapter 2: Free Cash Flow, Deferred Income, Issued Shares


Department
Management and Organizational Studies
Course Code
MOS 1023A/B
Professor
Maria Ferraro
Chapter
2

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Chapter 2 Financial Statements: Framework,
Presentation ad Usage
Conceptual Framework of Accounting:
Guides …
o decisions about what to present in financial statements,
o alternative ways to document economic events and
o appropriate ways of communicating this information
Why is it needed?
o Ensures existing standards are clear and consistent
o Makes it possible to respond quickly to new issues
o Increases relevance, faithful representation,
comparability and understandability of reports
Need?
o To develop a coherent set of standards and principles
o To solve new and emerging practical problems
Foreign currency transactions
4 main sections:
Main goal = Provide information that is useful to individuals who are
making the investment/credit decisions
Trueblood Committee (1970s)
o All about forecasting for the future and determining
future cashflows
Elements such as: amounts, timing and uncertainty of future
cashflows, assets, liabilities and equity
Qualitative characteristics of accounting information:
Must be preformed in order …
How we can make informed decisions about financial
statements
o Must have tradeoff along these characteristics
Relevance:
CFA has relevance if it will make a difference in users’
decisions
Predictive value helps users make predictions about the
potential effects of past, present, future truncations or other
events
Feedback value - Helps users confirm or correct their
previous expectations
Timely to bee relevant accounting information must be
timely
Faithful Representation:

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Financial reporting must present the economic substance of
transaction, not just its legal form
Reflect the true economic reality of corporation
Verifiable two or more people reviewing info should be
able to come to same or similar conclusions
Neutrality the absence of bias
o Accounting info cannot be created to favour one set of
interests
Completeness all information that is needed to faithfully
represent the economic reality
Substance over form
the economic impact overrides the
legal form
o Leasing and Enro’s SPE’s to hide debt
Comparability:
When companies with similar circumstances use the same
accounting standards
o ID’s similarities and differences between companies
Consistency - using same accounting treatment for similar
events from year to year
Companies can change accounting standards only if change is
required by Accounting Standards Board OR if change will
result in more relevant decision making
Understandability:
Average investor is assumed to understand the accounting
information
Base level of understandability =
o Average user is assumed to have a reasonable
understanding of accounting concepts and
o procedures as well as general business sense
Recognition and measurement criteria:
Accountants need detailed criteria to help them decide when
and where an item is included in the financial statements
Assumptions:
Create a foundation for accounting process
Indicate how economic events should be reported
Constraints make it possible to relax the principles under
certain circumstances
Monetary Unit Assumption:
o Only those things that can be expressed as money can
be included in financial report
o Unit of measurement stays the same overtime
Effects of inflation (or deflation) are assumed to
be minor and are therefore ignored
Economic Entity Assumption:
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o Economic activity can be IDed with a particular
accounting unit (company)
o that is separate from the activities of the shareholders
and all other economic entities
Time Period Assumption:
o Activities of company can be subdivided into months,
quarters or years for meaningful financial reporting
even thought operations do not cease after time period
o Interim periods: reporting periods of less than one year
Going Concern Assumption
o Business will remain operational for foreseeable future
o Directly related to cost principle
o If a going concern is not assumed ..
Assets should be stated at liquidation value, not
cost
Classifying assets/liabilities as short/long-term is
irrelevant
Liquidation of business is likely
Accounting Principles:
Generally accepted Accounting Principles (GAAP)
o these principles that have authoritative support
through Canadian and provincial business corporation
acts and legislations
Cost principle :
o assets should be recorded at their cost at the time of
acquisition
o Ex: land
Cost is most relevant value b/c land is intended
for business use
Reported at cost until it is either sold or going
concern assumption is no longer valid
o Fair value is more subjective; costs are easily verified
and neutral
o Issues
Historical costs provides a reliable benchmark for
measuring historical trends
Fair value information may be more useful
Reporting of fair value information is increasing
Full Disclosure principle
o At all circumstance and events which would make a
difference to financial statements users are disclosed
o Providing data in the financial statements and the
accompanying notes to the financial statements
Cash Basis of Accounting
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