Chapters 1 & 2 Can. Fin Envir. + Concep. Framework Underlying Fin. Reprtng Flashcards
(103 cards)
1
Q
3 Essential characteristics of accounting
A
- Identification, measurement, and communication of financial info (2) about economic entities (3) to interested persons.
2
Q
What is Managerial Accounting?
A
(1) Identifying, measuring, analyzing, and communicating financial info (2) about economic entities (3) to internal decision-makers.
3
Q
4 Frequently provided financial statements
A
- Statement of financial position (Balance Sheet)
- Statement of Income/Comprehensive Income (Income Statement)
- Statement of Cash Flows (Cash Flow Statement)
- Statement of Changes in Equity
4a. Under ASPE, the Statement of Retained Earnings is prepared instead.
4
Q
Describe the pronouncements that comprise IFRS
A
International Financial Reporting Standards are the standards and interpretations issued by the IASB and its predecessor body, the IASC:
- International Financial Reporting Standards (IFRS)
- International Accounting Standards (IAS)
- International Financial Reporting Committee Interpretations (IFRIC)
- Statements of the Interpretations Committee (SIC)
5
Q
How does a company determines which type of pronouncement takes precedence when deciding the recognition, valuation, and disclosure related to a particular program.
A
The IASB sets out a hierarchy of sources that make up IFRS generally accepted accounting principles (GAAP). These are, in descending order:
- When there is a specific standard that applies (use those listed in [a] above).
- If there is no specific IFRS standard, then management applies professional judgement in determining what is GAAP, considering the conceptual framework and accounting standards used for similar transactions and events.
- Other sources might be referred to. These include, for example, pronouncements of other standard-setting bodies that use a similar conceptual framework, the accounting literature, and accepted industry practices.
Any company indicating that it is preparing its financial statements in conformity with IFRS must comply with all these standards and interpretations.
6
Q
A
7
Q
What is the purpose of the Accounting Standards Advisory Forum?
A
To provide technical advice to the IASB, consisting of representatives from national standard setters from around the world
8
Q
What does ASPE stand for?
A
Accounting Standards for Private Enterprises
9
Q
Who is primarily responsible for setting GAAP in Canada?
A
Accounting Standards Board (AcSB)
10
Q
What organization preceded Chartered Professional Accountants Canada (CPA Canada)?
A
Canadian Institute of Chartered Accountants (CICA)
11
Q
What is the role of the Accounting Standards Oversight Council (AcSOC)?
A
To provide oversight to AcSB activities such as setting the agenda and reporting to the public
12
Q
Define bright-line tests in financial reporting.
A
Quantitative thresholds that act as a benchmark for accounting
13
Q
What is adverse selection?
A
A result of information asymmetry attracting the wrong types of companies to the marketplace
14
Q
What does aggressive accounting refer to?
A
A bias focusing more on positive information, potentially overstating net income or net assets
15
Q
Define data governance.
A
A collection of processes, roles, policies, standards, and metrics for effective information use
16
Q
What is conservative accounting?
A
A bias ensuring that uncertainty leads to understated net income and/or net assets
17
Q
What is the Canadian Public Accountability Board (CPAB)?
A
The regulatory oversight body for audit quality in Canada
18
Q
What is capital allocation?
A
The process enabling investors and creditors to assess relative returns and risks
19
Q
What does the CPA Canada Handbook provide?
A
Principles and guidelines for accounting and assurance
20
Q
What is the decision-usefulness approach?
A
Providing financial information that is useful to stakeholders
21
Q
Who is the main professional accounting body in Canada?
A
Chartered Professional Accountants of Canada (CPA Canada)
22
Q
What is due process in standard setting?
A
A method ensuring standard-setting bodies operate transparently and allow public input
23
Q
What does the efficient markets hypothesis state?
A
Available information will be incorporated into decisions made by market participants
24
Q
What is financial accounting also known as?
A
Financial reporting
25
What is the entity perspective in financial reporting?
Viewing companies as separate from their owners for reporting needs
26
Define ethical dilemmas.
Problems with no set guidelines for resolution, involving moral considerations
27
What is the Financial Accounting Standards Board (FASB)?
The major standard-setting body in the United States
28
What are financial statements?
The principal means of communicating financial information outside a company
29
What is the GAAP hierarchy?
Guidance on using primary sources of GAAP, followed by other relevant sources
30
What are general-purpose financial statements?
Basic GAAP financial statements serving external users' information needs
31
What do generally accepted accounting principles (GAAP) refer to?
Common standards and procedures for preparing financial statements
32
What is the role of the IFRS Advisory Council?
To provide strategic advice to the IASB
33
What is the IFRS Discussion Group (IFRS DG)?
A subcommittee discussing issues arising from IFRS implementation in Canada
34
What are institutional investors?
Large corporations or corporate investors like pension funds or mutual funds
35
Define information asymmetry.
A state where one party has more information than another
36
What is information symmetry?
A state where both parties have access to the same information
37
What is the IFRS Foundation?
A group raising finances and providing oversight to the IASB
38
What is management bias?
Presentation of information by management to make the company appear successful
39
What does the International Financial Reporting Standards Interpretations Committee (IFRIC) do?
Studies and provides recommendations on issues not covered by the IASB
40
What are International Financial Reporting Standards (IFRS)?
The internationally recognized set of financial reporting standards
41
What is the role of the International Accounting Standards Board (IASB)?
To set IFRS and increase transparency in financial reporting
42
What is the Ontario Securities Commission (OSC)?
Regulates companies listed on the Toronto Stock Exchange
43
What is moral hazard?
The risk that parties with more information will act in their own self-interest
44
What is managerial accounting?
Identifying, measuring, analyzing, and communicating financial information for internal decision-makers
45
What is the objective of financial reporting?
To communicate useful information for resource allocation decisions
46
What is professional judgement in accounting?
Application of general principles from the CPA Canada Handbook based on experience
47
What is the Securities and Exchange Commission (SEC)?
The U.S. counterpart regulating capital markets and supporting the FASB
48
What is the Public Company Accounting Oversight Board (PCAOB)?
The regulatory oversight body ensuring quality controls and independence in the U.S.
49
What is the proprietary perspective in financial reporting?
Focus on the needs of the owners of the company
50
What are provincial securities commissions?
Groups overseeing provincial capital marketplaces for compliance with legislation
51
What is the Toronto Stock Exchange (TSX)?
The largest stock exchange in Canada
52
Who are stakeholders in financial reporting?
Parties who rely on financial statements to make decisions
53
Define stewardship in the context of financial reporting.
Management's responsibility to manage assets with care and trust
54
What is value creation?
The process of creating potential realizable income and future benefits for stakeholders
55
What are the primary exchange mechanisms for allocating recourses in Canada?
1. Debt and Equity Markets
2. Financial Institutions.
56
T/F: Proficing an effectie system to facilitate capital allocation is critical to a healthy economy
True.
Efficient capital markets promote productivity, encourage innovation, and provide a platform for buying and selling securities and obtaining and granting credit
57
What are the results of efficient capital markets?
1. Promote productivity
2. encourage innovation
3. provide a platform for buying and selling securities
4. obtaining and granting credit
58
What leads to poor capital allocation?
Unreliable and irrelevant information.
59
Who are the users of financial information?
who:
1. prepare
2. rely on
3. review
4. audit / monitor financial information
Examples:
- investors
- creditors
- analysts
- managers
- employees
.....
60
What are some motivations to bias financial infomration?
1. Evaluation of Management Performance
2. Compensation Strucutre
3. Access to capital markets and meeting financial analysts' expectations
4. Contractual Obligations.
61
Name the standard setting bodies
1. AcSB (Canadian Accounting Standards Board)
2. IASB (International Accounting Standards Board)
3. FASB (Financial Accounting Standards Board)
4. Securities Comissions (OSC/SEC)
62
How have each of the standard setting bodies influenced GAAP Development?
- AcSB: GAAP for Canadian private companies, pension plans, and non-for-profit entities called: Accounting Standards for Private Enterprises (ASPE).
- IASB: GAAP for public companies called: International Financial Reporting Standards (IFRS)
- FASB: GAAP for US entities (US GAAP)
- Securities Commissions: Not reponsible for GAAP but require additional disclosures for public companies
63
How has each standard setting body's influence on GAAP apply to Canadian entities?
- AcSB: ASPE started on Jan 2011. Not-for-profits in public sector may follow public sector GAAP by Public Sector Accounting Board (PSAB).
- IASB: IFRS started Jan 2011. Private comp. and NFPs may choose to use it.
- FASB: Canadian public comps. may choose US GAAP.
- Securities Commissions: OSC reqs public comps. to follow IFRS or US GAAP if on US markets/exchanges starting on 2011
64
Under ASPE, what is the GAAP brakdown?
1. Primary sources
- Handbook (1400 - 3870)
- Accounting Guidelines
2. Other sources
- Background info and basis for conclusion docs issued by the AcSB.
- Pronouncements by standard-setting bodies to comply with Canadian GAAP for private entities
- Approved drafts of primary sources of GAAP.
- Research Studies
Accounting books, journals, studdies, and articles
- Industry practices.
65
Challenges and Opportunities for Accountants
1. Impact of Technology
2. Sustainability Reporting:
- ESG: G: 1. Quality of board of directors. 2. Oversight of Ececutive performance. 3. Oversight of the company's strategy, risk management, performance and disclosure.
3. Oversight in the Capital Marketplace.
4. Centrality of Ethics.
5. Standard Setting in a Political Environment.
6. Principle Vs. Rules
66
67
What does IFRS stand for?
International Financial Reporting Standards
## Footnote
IFRS is used for public companies and is part of the big GAAP framework.
68
What does ASPE stand for?
Accounting Standards for Private Enterprises
## Footnote
ASPE is part of the little GAAP framework.
69
What are the main components of the balance sheet?
Assets, Liabilities, Equity
## Footnote
The balance sheet is divided into current assets, fixed assets, and intangible assets.
70
What is the role of financial reporting?
Aid users in making resource allocation decisions
## Footnote
Financial reporting provides information about economic resources, obligations, and net assets.
71
What is the difference between ASPE and IFRS regarding the balance sheet?
ASPE uses Balance Sheet, IFRS uses Statement of Financial Position
## Footnote
This reflects a different terminology used in the two frameworks.
72
What is the purpose of accounting in capital allocation?
Accurately measure an entity's performance
## Footnote
This allows investors to compare income and assess risks and returns.
73
What impact has technology had on accounting?
Emergence of data analytics and new job opportunities
## Footnote
Technology has increased the amount and variety of information available.
74
Define information asymmetry in the context of financial reporting.
Managers have access to more information than other stakeholders
## Footnote
This creates challenges in transparency and fairness.
75
What are the two types of information asymmetry problems?
Adverse selection, Moral hazard
## Footnote
These problems arise from management bias and self-interest.
76
What is the role of standards in financial reporting?
Aid preparers and users of financial statements
## Footnote
Standards ensure fair presentation of operations.
77
What is GAAP?
Generally Accepted Accounting Principles
## Footnote
GAAP varies between ASPE and IFRS frameworks.
78
What constitutes primary sources of GAAP under ASPE?
CPA Handbook, Accounting guidelines
## Footnote
These are essential for maintaining consistency in financial reporting.
79
What is the difference between a rules-based approach and a principles-based approach in accounting?
Rules-based relies on specific rules, principles-based relies on general principles
## Footnote
Canada primarily uses a principles-based approach.
80
What does ESG stand for in sustainability reporting?
Environmental, Social, and Governance
## Footnote
ESG issues are increasingly important for value creation.
81
What are some issues to be addressed with ESG?
* Environmental: climate change, air quality
* Social: diversity and inclusion, health and safety
* Governance: board quality, executive oversight
## Footnote
These factors are crucial for comprehensive sustainability reporting.
82
What is the purpose of the IASB's Conceptual Framework?
Define the objective of general-purpose financial reporting
## Footnote
It establishes qualitative characteristics and elements of financial statements.
83
List the enhancing qualitative characteristics of useful information.
* Comparability
* Verifiability
* Timeliness
* Understandability
## Footnote
These characteristics improve the usefulness of financial information.
84
What does the concept of materiality refer to?
How much a certain number or aspect affects decision-making
## Footnote
Materiality is critical for determining what information should be reported.
85
Describe dynamic materiality.
Evolves with changes in business, industries, and societal views
## Footnote
It includes a broader set of stakeholder considerations beyond financial information.
86
What is the Revenue Recognition Principle under IFRS?
Follows a 5-step approach to recognize revenue
## Footnote
Steps include identifying the contract, performance obligations, and transaction price.
87
What is the Fair Value Principle under IFRS?
The price that would be received to sell an asset in an orderly transaction
## Footnote
Fair value is crucial for accurate asset reporting.
88
What is the Matching Principle in accounting?
Matching revenues and expenses in the journal
## Footnote
It ensures that profits are accurately reported in financial statements.
89
Define derecognition in financial reporting.
Process of removing something from the balance sheet or income statement
## Footnote
This is essential for accurate financial reporting.
90
What does 'Going Concern' imply in financial statements?
The company will operate for the foreseeable future
## Footnote
Typically defined as at least 12 months ahead.
91
What are elements of financial statements?
* Assets
* Liabilities
* Equity
* Revenues
* Expenses
* Gains
* Losses
## Footnote
These elements are essential for constructing financial statements.
92
What is the difference between revenues and gains?
Revenues increase from ordinary activities; gains increase from incidental transactions
## Footnote
This distinction is crucial for accurate financial reporting.
93
ID which specific Qualitative Characteristic of Acc. Info is described: - 'X Inc.' Segregates info that relates to one of its two subs. which was disposed in the year but was included in the consolidated statements for prior years.
Comparibility:
- Comparability allows users to identify and understand similarities and differences among items.
- 'X Inc.' segregates information related to a subsidiary that was disposed of during the year. This helps users compare the current year's financials with prior years more accurately by clearly showing the impact of the disposal.
- This practice enhances transparency and ensures that users are not misled by aggregated figures that include operations no longer part of the entity.
94
ID which specific Qualitative Characteristic of Acc. Info is described:
- 'Y Inc.' exercises due care and professional judgement in developing all estimates and assumptions used to prepare its financial info.
Representational Faithfulness (Freedom from Material Error)
95
Indicate which element of the financial statements are impacted in the following example:
Notes Co. has a written contract to receive money from the sale of copies of future recordings of music yet to be written
Asset - contract represents a right that has the potential to produce future economic benefits to which the entity is entitles and has conrol over. Transaction that will generate the benefit has yet to occur
96
Indicate which element of the financial statements are impacted in the following example:
ReadyMart Inc. has inventory out on consignment at a retailer waiting for sale to the final customer
Asset - Cosignment inventory belongs until it is sold to the final customer. Represents a resource as it can be sold. The comp. still controls even though physical possession is with the retailers
97
Indicate which element of the financial statements are impacted in the following example:
Music Co. has a written contract to deliver a percentage of future music rev (royalties) from the sales of existing recordings.
Liability - an oblication that will result in future outflows, subject to the sale of the recordings. Liability will not occur until the recordings are sold.
98
ID. which foundational principle (# & title) applies to below:
Allocates expenses to revenues in the proper period.
Recognition/ Derecognition: 4. Matching Principle
- "proper period"
- The Matching Principle requires that expenses be recorded in the same period as the revenues they help to generate.
-This ensures that financial statements reflect the true profitability of a company during a specific time period.
99
ID. which foundational principle (# & title) applies to below:
Is why plant assets are not reported at their liquidation value (do not use historical cost principle)
Measurement: 7. Going Concern Principle
- "Liquidation Value" is only relevant when the company is set to close.
100
Which Foundational Principle best justifies the following procedure?
Price-level changes (inflation and deflation are not recognized in the accounting records .
Measurement: 6. Monetary Unit
101
Which Foundational Principle best justifies the following procedure?
the rationale for accural accounting is stated.
Presentation and full disclosure: 10. Full Disclosure.
102
Which Foundational Principle best justifies the following procedure?
An allowance for doubtful accounts is established.
Recognition / Derecognition: 4. Matching Principle.
- The main reason for creating an allowance for doubtful accounts is to match bad debt expense to the same period as the related sales revenue.
- When a company makes sales on credit, it records revenue immediately. But if some of those receivables are expected to go uncollected, the bad debt expense should be recorded in the same period — even if the actual default happens later.
- This ensures the income statement reflects the true profitability of that period.
103
Which Foundational Principle best justifies the following procedure?
Goodwill is recorded only at the time of a business combination and does not change unless the goodwill becomes impaired.
Measurement: 8. Historical Cost.
