Type:
Instructor Manual
Resource:
Intermediate Accounting
Edition:
10th Edition
Author(s):
Donald E. Kieso
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
CHAPTER 1
THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
CICA HANDBOOK Introduction and Overview: The CICA Accounting Handbook is comprised of the following: Part I Accounting, Part I International Financial Reporting Standards (IFRS) Part II Accounting, Part II Accounting Standards for Private Enterprises (ASPE) Part III Accounting, Part III Accounting Standards for Not-for-profit organizations Part IV Accounting, Part IV Accounting Standards for Pensions Part V Accounting, Part V Pre-changeover accounting standards
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Note that the focus of this text is on the first two parts. Part II (ASPE) was previously commonly referred to as Private Entity GAAP and includes many of the provisions in the pre-changeover accounting standards, though many have been simplified. Both IFRS and ASPE are required for year-ends beginning on or after 2011. A private enterprise is one that has not issued, and is not in the process of issuing debt or equity instruments that are, or will be, outstanding and traded on a public market. A private enterprise does not hold assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses.
CHAPTER OBJECTIVES Many students tend to skim through this chapter and, perhaps, dismiss it as of little importance since it does not contain any numbers and debits and credits— the things that they may believe accounting is all about. The chapter, however, provides a good opportunity to stretch their horizons and begin to build their own framework and perspective on this discipline. This can be done by emphasizing the broader role of accounting in society as a source of information about economic activity: that it involves much more than just making bookkeeping entries and deals with measurement and reporting alternatives that have an impact on resource allocation in our society, both at home and internationally. This is also a good time to point out the links between accounting and other courses in their curriculum, such as finance, economics, management, and organizational behaviour.
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Intermediate Accounting, Tenth Canadian Edition
LEARNING OBJECTIVES 1. Explain how accounting makes it possible to use scarce resources more efficiently. 2. Explain the meaning of “stakeholder” and identify key stakeholders in financial reporting, explaining what is at stake for each one. 3.
Identify the objective of financial reporting.
4.
Explain how information asymmetry and bias interferes with the objective of financial reporting.
5.
Explain the need for accounting standards.
6. Identify the major entities that influence the standard-setting process and explain how they influence financial reporting. 7. Explain the meaning of generally accepted accounting principles (GAAP). 8. Explain the significance of professional judgement in applying GAAP. 9.
Discuss some of the challenges and opportunities for accounting.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
CHAPTER REVIEW Financial statements and financial reporting 1.
World markets are becoming increasingly intertwined. And, due to technological advances and less onerous regulatory requirements, investors are able to engage in financial transactions across national borders, and to make investment, capital allocation, and financing decisions involving many foreign companies. As a result, an increasing number of investors are holding securities of foreign companies, and a significant number of foreign companies are found on national exchanges.
2.
Accounting is a service activity, a descriptive/analytical discipline, and an information system. It may be defined as the process of (1) identification, measurement, and communication of financial information about (2) economic entities to (3) interested persons. Its purpose is to help the interested person in making decisions.
3.
The focus of this text is on the subset of the accounting discipline known as financial accounting (financial reporting). This subset is concerned with the accumulation of financial information for the purpose of developing financial statements that report on an entity's financial position, the results of operations, and cash flows. The generalized format of these financial statements makes them useful to individuals both internal and external to the enterprise.
4.
A principal means of communicating financial information to those outside an enterprise is through financial statements: the balance sheet, income statement, statement of cash flows, and statement of owners’ or shareholders equity. Some alternative terminology used in IFRS for financial statement titles are: statement of financial position, statement of comprehensive income, statement of cash flows, and statement of changes in equity.
5.
Note disclosure, an important part of each financial statement, must be considered in conjunction with the information provided within the body of the statement. Additional financial information is often provided by means of financial reporting through other mechanisms such as the president’s letter, supplementary schedules in the corporate annual report, reports filed with government agencies, prospectuses and news releases. Such information may be required by authoritative pronouncements or regulatory agencies or disclosed because management wished to do so voluntarily.
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6.
Intermediate Accounting, Tenth Canadian Edition
The economic activities of a business enterprise represent a complex network of events that shape the financial position, results of operations, and cash flows of that enterprise. However, for those economic activities to be meaningful, they must be identified, measured, organized, and reported on in a manner that effectively serves users’ needs. Accounting is the process by which individual economic activities of an enterprise are accumulated into useful financial reports. This information affects perceptions of financial position and success. These perceptions can lead to changes in behaviour and, ultimately, decisions made about the company.
Accounting and capital allocation 7.
The fact that markets and free enterprise determine whether a business is successful places a substantial burden on the accounting profession to measure performance accurately and fairly on a timely basis. Investors must be able use the financial information provided to assess risk and relative returns associated with investment opportunities and thereby channel limited resources more effectively. In Canada, the primary exchange mechanisms for allocating resources are debt markets, equity markets, and financial institutions.
8.
An effective processing of capital allocation promotes productivity, encourages innovation, and provides an inefficient liquid market for buying and selling securities and obtaining and granting credit. When information is unreliable and irrelevant, poor capital allocation results.
Stakeholders 9.
Stakeholders are those who have something to risk as a result of financial reporting such as their jobs, salaries, investments, or reputation. Key stakeholders include traditional users of financial information (investors and creditors) who rely directly on the financial information for resource allocations. In broader terms, stakeholders include these traditional stakeholders as well as those who help in the efficient allocation of resources such as financial analysts, auditors, unions, industry groups, customers, employees, and regulators who review, audit and monitor information. Stakeholders also include management, the preparer of financial information.
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Intermediate Accounting, Tenth Canadian Edition
Objective of Financial Reporting 10.
The objective of general-purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers. a. General-purpose financial statements provide at the least cost the most useful information possible to a wide variety of users. b. Capital providers (investors) are the primary user group and have the most critical and immediate need for information in the financial statements. Investors need this information to assess a company’s ability to generate net cash inflows and to understand management’s ability to protect and enhance the assets of a company. c. The entity perspective means that the company is viewed as being separate and distinct from its creditors and owners (shareholders). Therefore, the assets of the company belong to the company, not a specific creditor or shareholder. Financial reporting focused only on the needs of the shareholder—the proprietary perspective—is not considered appropriate. d. Decision-usefulness means that information contained in the financial statements should help investors assess the amounts, timing, and uncertainty of prospective cash inflows from dividends or interest, and the proceeds from the sale, redemption, or maturity of securities or loans. In order for investors to make these assessments, the financial statements and related explanations must provide information about the company’s economic resources, the claims to those resources, and the changes in them.
11.
Information generated using the accrual basis of accounting provides a better indication of a company’s present and continuing ability to generate favourable cash flows than the cash basis.
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