Chapter 1/2

Question 1

Accounting Standards Board (AcSB)

Answer 1

the group primarily responsible for setting GAAP in Canada, which publishes the CPA Canada Handbook and other authoritative documents

Question 2

Accounting Standards Oversight Council (AcSOC)

Answer 2

the group that provides oversight to AcSB activities such as setting the agenda, reporting to the public, and raising funds for standard setting

Question 3

Adverse Selection

Answer 3

a result of information asymmetry whereby the capital marketplace may attract the wrong types of companies (such that companies with higher-quality products may choose not to enter the market)

Question 4

Canadian Public Accountability Board (CPAB)

Answer 4

the regulatory oversight body that oversees audit quality for Canadian firms performing auditing work

Question 5

Chartered Professional Accountants of Canada (CPA Canada)

Answer 5

the main professional accounting body for profeessional accountants in Canada that also has primary responsibility for setting GAAP in Canada through the Accounting Standards Board

Question 6

Entity Perspective

Answer 6

the viewpoint that companies are viewed as separate and distinct from their owners and therefore financial reporting should focus on the needs of the main users and not just the owners

Question 7

Financial Accounting Standards Board

Answer 7

the major standard-setting body in the United States; final authority rests with the Securities and Exchange Commission (SEC)

Question 8

GAAP Hierarchy

Answer 8

primary sources of GAAP should be used first, followed by other relevant and reliable sources, including the conceptual framework and professional judgment; finally, industry standards may be considered

Question 9

Moral Hazard

Answer 9

a risk that certain parties who have additional information not accessible to others will act in their own self-interest

Question 10

International Accounting Standards Board (IASB)

Answer 10

the group responsible for setting IFRS with the goal of increasing the transparency of financial reporting by achieveing a single, global method of accounting

Question 11

Ontario Securities Commission (OSC)

Answer 11

regulatory body of companies listed on the TSX that reviews and monitors their financial statements with a view to assessing whether the statements present fairly the financial position and result of operations

Question 12

Securities and Exchange Commission (SEC)

Answer 12

the US counterpart of the Ontario Securities Commission, which regulates the US capital markets and supports the FASB by indication that financial statements conforming with FASB standards will be presumed to have substantial authoritative support

Question 13

Stakeholders

Answer 13

parties who rely on and use financial documents to make decisions

Question 14

Fundamental Characteristics

Answer 14

these are the two main qualitative characteristics of financial reporting; they are relevance and representational faithfulness; these characteristics must always be present in financial reporting

Question 15

Enhancing Characteristics

Answer 15

characteristics that enhance the fundamental qualitative characteristics of relevance and representational faithfulness:
(1) comparability or consistency
(2) verifiability
(3) timeliness
(4) understandability
trade-offs must be made between enhancing characteristics

Question 16

Comprehensive Income

Answer 16

a measure of income under IFRS that includes net income plus other comprehensive income

Question 17

Conceptual Framework

Answer 17

the framework is structured as a pyramid whereby (1) the first level is the objective of financial accounting (2) the second level is the qualitative characteristics and elements of financial accounting (3) the third level is the foundational principles

*built on an established body of concepts and objectives, leading to consistent standards
*assists with solving new and emerging practical problems more quicly
*increases financial statement users’ understanding of and confidence in financial reporting

Question 18

Control

Answer 18

a foundational principle of financial reporting; under ASPE, the continuing power to determine the strategic operating, financing, and investing policies of another entity without the co-operation of others; under IFRS, the power to direct the activities of another entity to generate returns or losses for the investor

Question 19

Economic Entity Assumption

Answer 19

a foundational principle of financial reporting; an assumption that a business activity can be kept separate and distinct from its owners and any other business units; economic activity can therefore be identified with a particular degree of accountability

Question 20

Equity

Answer 20

the residual interest in the assets of a company that remains after deducting its liabilities

Question 21

Objectives of Financial Reporting

Answer 21

the ‘top’ of the conceptual framework pyramid: to provide information useful in investment and credit decisions; and, useful in making resource allocation decisions including assessing management stewardship

Question 22

Verifiability

Answer 22

an enhancing characteristic of the fundamantal qualitative characteristics of financial reporting; the quality of information that demonstrates that independent measurers, using the same measurement methods, obtain similar results

Question 23

Timeliness

Answer 23

an enhancing characteristic of the fundamantal qualitative characteristics of financial reporting; a characteristic of relevance that states that information should be available for decision-makers before it loses its capacity to influence their decisions

Question 24

Understandability

Answer 24

an enhancing characteristic of the fundamantal qualitative characteristics of financial reporting; the quality of information that permits reasonably informed users to perceive its significance

Question 25

Revenue Recognition and Realization

Answer 25

a foundational principle of financial reporting; the accounting principle that sets guidelines as to when something should be included in the entity's income statement

Question 26

Matching

Answer 26

a foundational principle of financial reporting; the accounting principle that dictates that efforts (expenses) be matched with accomplishments (revenues) whenever reasonable and practicable

Question 27

Periodicity

Answer 27

a foundational principle of financial reporting; the accounting assumption that implies that a company's economic activities can be divided into artificial time periods

Question 28

Monetary Unit

Answer 28

a foundational principle of financial reporting; the assumption (principle) that money is the common denominator of economic activity and provides an appropriate and stable basis for accounting measurement and analysis

Question 29

Going Concern

Answer 29

a foundational principle of financial reporting; the assumption that the entity will continue to operate and meet all of its obligations for at least twelve months

Question 30

Historical Cost

Answer 30

a foundational principle of financial reporting; measurement of transactions and balances are made on the basis of acquisition price

Question 31

Fair Value

Answer 31

a foundational principle of financial reporting; an estimate of the price a company would receive if it had sold the asset or would have paid, if it had been relieved of the liability, on the measurement date in an arm's-length exchange motivated by normal business considerations

Question 32

Full Disclosure

Answer 32

a foundational principle of financial reporting; financial reporting of information significant enough to influnce the judgement of an informed reader

Question 33

Foundational Principles

Answer 33

the 'base' of the conceptual framework pyramid, including the following principles: 1. economic entity 2. control 3. revenue recognition and realization 4, matching 5. periodicity 6. monetary unit 7. going concern 8. historical cost 9. fair value 10. full disclosure

Question 34

Predictive Value

Answer 34

an element of relevance; a characteristic of accounting information that helps users make predictions about the ultimate outcome of past, present, and future events

Question 35

Neutrality

Answer 35

the quality of accounting information that ensures faithful representation by being factual, truthful, and unbiased; is not selected to favour one set of parties over another

Question 36

Freedom From Error

Answer 36

an element of representational faithfulness; a measure of the reliability of reported information, assuring that the relevant information is accurate and unaffected by the opinions of stakeholders

Question 37

Relevance

Answer 37

one of the fundamental qualitative characteristics of financial reporting; it should have predictive value, feedback value, and materiality

Question 38

Representational Faithfulness

Answer 38

one of the fundamental qualitative characteristics of financial reporting; it is transparent, complete, neutral, and free from material error and bias

Question 39

Value in Use

Answer 39

the present value of future cash flows expected to be derived from an asset's use and subsequent disposal; it is an entity-specific measure

Question 40

Gains

Answer 40

increases in equity (net assets) from a company's peripheral or incidental transactions and from all other transactions and other events and circumstances affecting the company during a period, except those that result from revenues or investments by owners

Question 41

Liabilities

Answer 41

duties or responsibilities (to transfer economic resources) resulting from a past transaction or event

Question 42

Objective of Financial Reporting

Answer 42

the goal "to communicate information that is useful to investors, members, contributors, creditors, and other users in making their resource allocation decisions and/or assessing management stewardship" per CPA Canada Handbook

Question 43

Feedback/Confirmatory Value

Answer 43

an element of relevance; the notion that relevant information helps users confirm or correct prior expectations

Question 44

Materiality

Answer 44

an element of relevance; the concept that relates to an item's impact on a company's overall financial operations; an item is material if its inclusion or omission would influence or change the judgement of a reasonable person

Question 45

Comparability

Answer 45

an enhancing characteristic of the fundamantal qualitative characteristics of financial reporting; information that is comparable is measured and reported in a similar manner for different companies and time periods

Question 46

Information Assymetry

Answer 46

When investors do not have access to the same information as other users of financial information, such as insiders, they are unable to analyze securities with the same degree of accuracy as those users. There is a moral hazard that agents such as managers will act in their own best interests instead of those of the principal (investory). If asymmetric information in capital markets is widespread, this could result in adverse selection, whereby investors place lower values on securities due to the information asymmetry and therefore only companies who know that they deserve lower valuations are willing to raise funds in capital markets. The result is a "market for lemons" where low-quality investments are traded cheaply, which hurts high quality companies and investors alike.

Question 47

Sarbanes-Oxley Act

Answer 47

(1) requires disclosure that a code of ethics exists for senior financial officers (2) requires CEOs and CFOs to forfeit bonuses if there is a restatement of accounting disclosures (3) requires independence and financial expertise for auditors