Week 2-3 (Lecture) (chapter 3)

Chapter 3: The Accounting Framework Overview

Focuses on the users of accounting information, fields of accounting, business organizations, accounting standards in Canada, qualitative characteristics of financial information, and ethics in accounting.

Learning Objectives

• LO 3-1: Describe the users of accounting information.

• LO 3-2: Describe the fields of accounting.

• LO 3-3: Compare the different forms of business organization.

• LO 3-4: Distinguish the two accounting standards used in Canada.

• LO 3-5: Identify the objective and qualitative characteristics of financial information.

• LO 3-6: Identify the key financial statement foundations.

• LO 3-7: Explain the importance of ethics in accounting.

Users of Accounting Information (LO 3-1)

Objective: Prepare financial statements to assist users in decision-making.

Types of Users:

• Internal Users:

  • Owners and employees who make internal decisions based on financial data.

  • Example: A manager using sales reports to assess employee performance and forecast future sales.

• External Users:

  • Investors, suppliers, lenders, and customers who rely on financial statements for business decisions.

  • Example: Potential investors examining financial statements to determine if a company is a viable investment opportunity.

Fields of Accounting (LO 3-2)

Importance: Accountants ensure both internal and external users have necessary information for decisions.

Functions of Accountants:

• Financial Statement Preparation: Creation of balance sheets, income statements, and cash flow statements.

• Tax Return Preparation: Helping clients ensure accurate reporting and compliance with tax regulations.

• Auditing: Conducting independent verification of financial statements for accuracy.

• Consulting: Advising businesses on best practices and financial strategies.

Types of Accounting:

• Financial Accounting:

  • Prepares financial statements for external users, focused on record keeping and objectivity.

• Management Accounting:

  • Provides specialized reports for internal users to assist in decision-making. Example: Budgets, forecasts, and performance analyses.

Accounting Designations

Education required for the accounting field; key certifications include:

• Chartered Professional Accountant (CPA): Regulated body in Canada that establishes high standards of professional competence and accountability.

• Certified Professional Bookkeeper (CPB): Recognized certification focused on bookkeeping and financial record management.

Forms of Business Organization (LO 3-3)

The organizational structure determines legal and accounting standards.

Types of Organizations:

• Sole Proprietorship:

  • Owned by one person, with personal financial affairs tied to the business (unlimited liability).

  • Example: An individual running a small bakery.

• Partnership:

  • Owned by two or more individuals, requires a partnership agreement, may involve unlimited liability.

  • Example: A law firm ran by multiple attorneys.

• Corporation:

  • Registered business with limited liability for shareholders; managed by a board of directors that can have an indefinite life.

  • Example: A multinational retail corporation.

• Nonprofit Organizations:

  • Focus on societal benefit rather than profit; funded through donations and grants.

  • Example: Charitable organizations that provide community services.

Summary of Differences in Business Structures

Accounting Standards in Canada (LO 3-4)

Standards govern how financial information is reported.

Canadian Accounting Standards Board (AcSB):

• Public Enterprises: Must use International Financial Reporting Standards (IFRS) which focuses on providing a true and fair view of a company's financial position.

• Private Enterprises: Can use either IFRS or Accounting Standards for Private Enterprises (ASPE), which are designed to make it easier for smaller businesses to comply.

Comparison of ASPE and IFRS

• ASPE: Simpler and less costly to implement, tailored for private enterprises.

• IFRS: More global relevance with greater disclosure requirements, preferred for companies engaging in international activities.

Qualitative Characteristics of Financial Information (LO 3-5)

Key Characteristics:

• Relevance: Useful information that influences decisions and predictive value for financial forecasts.

• Faithful Representation: Accurate depiction of financial events, reflecting the true essence of transactions.

• Comparability: Consistent preparation of financial statements over periods to facilitate decision-making.

• Verifiability: Availability of support for transactions that can be independently verified.

• Understandability: Information presented should be easy to understand for users not versed in accounting.

• Timeliness: Information should be available in a timely manner, relevant to the decision at hand.

Considerations When Preparing Financial Statements

• Benefit vs. Cost: The cost of providing perfect information should not exceed its benefit, ensuring economic viability.

• Materiality: Information should be significant enough to impact decision-making, whereby minor details may be disregarded.

• Prudence: Caution in estimates to not overstate revenues/assets or understate expenses/liabilities.

Financial Statement Foundations (LO 3-6)

Basic reporting structures include:

• Identifiable Reporting Entity: Must be distinct and separate from personal affairs of owners or stakeholders.

• Control: The company must control the resources it reports, ensuring they are genuinely owned.

• Unit of Measure: Financial data expressed in a single currency, providing clarity in transactions.

• Basis of Accounting: Either accrual-based or cash-based, dependent on timing of when transactions are recorded.

Disclosure and Going Concern

Disclosures must provide a complete understanding of financial records and the assumption of continuing business operations into the foreseeable future raises the importance of transparency.

Importance of Ethics in Accounting (LO 3-7)

Trust in financial records is crucial for stakeholders' decision-making. Accountants must report financial status accurately and adhere to ethical standards:

• Professional Behavior: Accountability toward professional conduct.

• Integrity: Honest representation of financial information.

• Objectivity: Free from conflicts of interest.

• Competence: Providing services that are within area of expertise.

• Confidentiality: Maintaining the privacy of sensitive business information.

Summary

This chapter explores key aspects of the accounting framework from users of information to ethical considerations, providing a comprehensive understanding of its role in business decision-making.