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Chapter 1

Management and Organizational Studies 3360A/B Chapter Notes - Chapter 1: Financial Statement, Financial Accounting, Income Statement

Management and Organizational Studies
Course Code
MOS 3360A/B
Stacey Hann

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Chapter 1: The Canadian Financial Reporting Environment
Financial Statements and Financial Reporting
Accounting the identification, measurement, and communication of financial
information about economic entities to interested persons
Characteristics of accounting:
o Identify, measure, and communicate
Financial accounting (financial reporting) the process that ends in the preparation of
financial reports that cover all of the enterprises business activities and that are used by
both internal and external parties
Managerial accounting the process of identifying, measuring, analyzing, and
communicating financial information to internal decision makers
Financial statements the principal way of communicating financial information to
those who are outside an enterprise
o Statement of financial position (balance sheet)
o Statement of income/comprehensive income (income statement)
o Statement of cash flows
o Statement of changes in equity
Note disclosers Present all such information which cannot be presented on the face of
income statement, balance sheet, statement of cash flows and statement of changes in
Other forms of financial reporting include:
o President’s letter
o Prospectuses
o Government reporting
o News releases
o Management forecasts
o Descriptions of company’s social/environmental impact
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Accounting and Capital Allocation
Accountants have an important responsibility of measuring company performance
accurately and fairly on a timely basis
The information 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 opportunities
o By assessing risks, investors and creditors can direct their resources more
Debt and equity markets, and financial institutions are the primary exchange mechanisms
for allocating resources
Stakeholders parties who have something at risk in the financial reporting environment
(such as their salary, job, investment, or reputation)
Stakeholders are usually individuals who are traditional users of financial information
o Anyone who prepares, relies on, reviews, audits, or monitors financial
o E.g. creditors, investors, analysts, customers, suppliers, public, employees,
government departments, etc.
Company management prepares the financial statements
o Has the best insight into the business and therefore knows what should be
Auditors audit the financial statements
o They act on behalf of the shareholders to ensure that management is accounting
properly for the economic transactions
Auditors also review the information to ensure that it reflects sound accounting choices
o Ensures GAAP has been followed
Investors and creditors rely on the financial statements to make decisions
Securities commissions and stock exchanges monitor the financial statements the
financial statements to ensure full disclosure of material information and determines
whether the companies may continue to list their shares on the stock exchange
What is at stake?
Job, bonus, reputation,
salary increase
Stock exchange
Reputation, effective and
efficient marketplace
Reputation, profit
Reputation, profit
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