FinAcc1 - Chapter 1

difference between financial accounting and managerial accounting?

financial accounting is preparing financial reports used by both **internal and external** parties,

managerial accounting is **communicating financial info to internal** decision makers.

financial statements communicate info to who?

those outside the enterprise

objective of financial reporting

provide financial info that is useful to users in making decisions

entity perspective vs proprietary perspective

what do we use?

entity: companies are viewed as separate and distinct from owners (we use this)

proprietary: financial reporting focused only on needs of shareholders

what is information symmetry?

why is it difficult to achieve this?

theory that all stakeholders should have equal access to information

difficult because disclosing too much info may hurt company’s competitive advantage/position

2 main reasons why info asymmetry exists

1. capital markets (stock exchanges) do not disclose all information into their stock price
2. due to human behavior, some people may maximize their own well being at the cost of others. (ex: management showing only positive info to maximize their own personal bonuses)

2 types of information asymmetry

adverse selection and moral hazard

adverse selection?

give an example

marketplace attracts wrong type of participants

ex: if buyers do not know how to assess product quality, they may not buy anything or only buy at a discount. knowing this, sellers only sell bad quality products, leading to market failure.

moral hazard?

what can this lead to?

concept that people often slack off if no one is watching.

can lead to management bias: hiding negative info to make their company look good

stewardship

how well management looks after invested money in company

under ASPE, what are the 2 primary sources of GAAP?

what are other sources?

CPA Canada Handbook, Part II, accounting guidelines

other: acsb background info, pronouncements, research studies, accounting textbooks, journals, studies, articles

under IFRS, what 3 standards does GAAP consist of?

IFRS

International accounting standards (IAS)

Interpretations (IFRIC)

standard setting org:

GAAP for private enterprises (ASPE), produces CPA Canada handbook

canadian accounting standards board (AcSB)

standard setting org:

GAAP for public companies (IFRS), global method of accounting

international accounting standards board (IASB)

standard setting org:

US GAAP

financial accounting standards board (FASB)

what is the securities commission in Canada? US? what is their role?

Canada: Ontario Securities Commission (OSC)

US: Securities and Exchange Commission (SEC)

role: oversee and monitor capital marketplaces

what is the key issue regarding GAAP in various jurisdictions?

IFRS and ASPE are principles based, while US GAAP is rules based

professional judgement

there cannot be a rule for every situation

IFRS and ASPE focus on this, because they go by general principles, not specific rules

term that describes a collection of processes, roles, policies, standards and metrics that ensure effective and efficient use of info to enable an org to achieve its goals

data governance

public companies and IFRS must disclose all material info relating to business

T/F?

true

to match the SOX, which 2 organizations were formed?

canadian public accountability board (CPAB)

canadian securities administrators (CSA)

how does accounting help the capital allocation process?

accounting is responsible for measuring company performance, and info lets users compare and assess risk and returns of various investment opportunities

list 3 different stakeholders of financial accounting info and how they would use financial statement information

investors - make investment decisions

creditors - assess ability to make debt obligations

management - internal decision making and performance eval

which organization is dominant worldwide for setting accounting standards?

IASB - international accounting standards board

Some individuals have argued that all Canadian companies should follow the same set of accounting principles. Explain why there are multiple sets of standards in Canada.

Must be multiple sets to accommodate diverse needs in the industry. IFRS aligns standards with international norms, while ASPE consists of smaller enterprises, which may have limited resources and different levels of complexity in financial reporting requirements.