Chapter 1

Question 1

Accounting (def)

Answer 1

Accounting identifies, measures and communicates financial information about economic entities to interested persons.

Question 2

2 broad accounting classifications

Answer 2

Financial Accounting
Managerial Accounting

Question 3

Financial Accounting

Answer 3

1. Preparation of FS
2. Internal and external users
3. Investors, creditors and others

Question 4

Managerial Accounting

Answer 4

1. Communicates financial information through varied forms
2. Internal decision-makers
3. Management uses to plan, evaluate, control operations

Question 5

Goal of FS

Answer 5

communicates financial information to outsiders

Question 6

Major FS

Answer 6

1. Statement of financial position / Balance sheet
2. Statement of Income / Statement of comprehensive income / Income statement / Statement of profit or loss / statement of financial performance
3. Statement of cash flows / Cash flow statement
4. Statement of changes in equity (IFRS) / Statement of retained earnings (ASPE)

Question 7

Sources for resource allocation

Answer 7

1. Debt and equity markets
2. Financial institutions

Question 8

Key stakeholders of FS and what is at stake

Answer 8

1. Investors / creditors: investment/loan
2. Management: Job, bonus, salary increase, access to capital markets by company
3. Securities commissions and stock exchanges: reputation, effective and efficient capital marketplace
4. Analysts and credit rating agencies: reputation, profits
5. Auditors: reputation, profits
6. Standard setters: reputation

Question 9

Objective of Financial Reporting

Answer 9

To provide financial information about the reporting entity that is useful to current and potential decision makers (decision-usefulness approach)

Question 10

Information symmetry

Answer 10

All stakeholders should have equal access to all relevant information

Question 11

Information Asymmetry

Answer 11

When managers have access to more information than other stakeholders

Question 12

Cost/benefit of sharing information

Answer 12

More information - could facilitate flow of capital and lower the cost of capital

Too much information - give away proprietary information that could cause profits to fall and impact a company’s competitive advantage

Question 13

Reasons for information asymmetry

Answer 13

1. efficient markets hypothesis
2. human behaviour

Question 14

Types of asymmetry problems

Answer 14

1. Adverse selection: knowing that there is information asymmetry, capital markets may attract wrong kinds of participants
2. Moral Hazard: concept that people will shirk responsibility if there is no accountability

Question 15

Information Asymmetry Issues (management bias)

Answer 15

1. Aggressive accounting - downplay the negative and focus on the positive
2. Conservative accounting - downplay the positives and focus on the negatives

Question 16

What are accounting standards

Answer 16

Standards are not rules, regulations or laws; they are recommendations

Question 17

AcSB

Answer 17

Canadian Accounting Standards Board
- Canadian private companies (ASPE)
- Pension plans
- not-for-profit entities

Question 18

IASB

Answer 18

International Accounting Standards Board
- public companies (IFRS)
- option for not-for-profit entities and private companies

Question 19

FASB

Answer 19

Financial Accounting Standards Board
- US entities (US GAAP)
- option for Canadian public companies listed on a US stock exchange

Question 20

Value Creation

Answer 20

Process of creating potential for
- revenue and net income in the future
- future benefits for stakeholders

Question 21

ESG

Answer 21

environmental, social and governance