Financial Accounting

Financial Accounting

Like social sciences, accounting is largely a product of its environment. Overtime, economic entities have become ever increasing in size and complexity. As a result, accounting Objectives and practices are not the same today as they were in the past. Accounting theory and practice have always evolved and will continue to evolve. BEE -2 . Explain generally how financial accounting and managerial accounting are different from each other?

Financial accounting measures, classifies, and summarizes in report form those activities and that information which relate to the enterprise as a whole for use by parties both internal and external to a business enterprise. The principal focus can be seen to be external to the enterprise. Managerial counting also measures, classifies, and summarizes in report form enterprise activities, but the communication is for the use of internal, managerial parties, and relates more to subsystems of the entity.

Managerial accounting is management decision oriented and directed more toward product line, division, and profit centre. BE 1-3 How does accounting help the capital allocation process? Accounting has the responsibility of measuring company performance accurately and fairly on a timely basis. This enables investors and creditors to assess the relative risks and returns of investment opportunities and channel sources more effectively. If a company’s financial performance is measured accurately, fairly, and on a timely basis, the right managers and companies are able to attract investment capital.

Unreliable and irrelevant information leads to poor capital allocation, which adversely affects the securities market and ultimately the performance of the economy as a whole. BE 1-4 Identify at least 3 major stakeholders that use financial accounting information and briefly explain how these stakeholders might use the information form financial statements. Some stakeholders who use financial accounting information and financial tenements are: Investors- these stakeholders are interested in the performance of their investment in the company.

They will use the financial statements to evaluate management stewardship and effectiveness. Creditors- these stakeholders are interested in evaluating the company to decide whether to lend money to it. They will use the statements to evaluate the risk that will be taken in making the loan. For example, lenders want to know whether the company will be able to repay its loans when due and service interest and principal on a timely basis. Canada Revenue Agency- these stakeholders establish the rules for how taxable income will be assured.

They are interested in the fair measurement of the financial position and performance of the company so that the appropriate amount of tax will be paid. Note that in preparing the tax return, the financial statements, net income is the starting point and is then adjusted to arrive at taxable income, which is used to calculate the amount of taxes payable. Financial Analysts- these stakeholders provide investment advice to their clients. They are interested in evaluating the investment opportunities and potential of various companies.

BEE -5 What is the difference between “financial statements” and “financial porting”? Financial statements generally refer to the four basic financial statements: balance sheet, income statements, statement of cash flows, and statement of changes in owners’ or shareholders’ equity. Financial reporting is a broader concept; it includes the basic financial statements and any other means of communicating financial and economic data to interested external parties.

Examples of financial reporting other than financial statements are annual reports, prospectuses, reports filed with government agencies, earnings releases, management forecasts or plans, and descriptions of an enterprise’s social or environmental impact. BE 1-6 What are the major objectives of financial reporting? The overall objective is to provide financial information that is useful to users that is decision relevant. The statements should communicate information about. 1 . The entities’ economic resources and claims to those resources and. . Changes in those resources and claims Note the emphasis on resource allocation decisions, which is a balance sheet focus. The assessment of management stewardship is also important since users need to know whether management is doing their job to maximize hardheaded value (which is also called fiduciary duty). As a general rule, it is assumed that management stewardship is already taken into account in the resource allocation decision. BE 1-7 What is the value of having a common set of standards in financial accounting and reporting?

A common set of standards applied by all businesses and entities provides financial statements which are reasonably comparable. Without a common set of standards, each enterprise could, and would, develop its own theory structure and set of practices, resulting in a lack of comparability among enterprises. BE 1-8 What is the likely limitation on “general purpose financial statements? General-purpose financial statements are not likely to satisfy the specific needs of all interested parties.

Since the needs of interested parties such as creditors, managers, owners, governmental agencies, and financial analysts vary considerably, it is unlikely that one set of financial statements would be equally appropriate for these varied uses. The level of detail in financial statements is based on specific requirements in accounting standards and management’s perception of users’ needs, balanced against the cost of roving this additional information, BE 1-9 What are some of the developments or events that occurred between 1900 and 1930 that helped bring about changes in accounting theory or practice?

Accounting was affected and changed between 1 900 and 1930 by the growth of the corporate form of enterprise, the growing separation of management from ownership, the imposition of tax on business and individual income, and the stock market crash and great depression. BEE -10 Which organization is currently dominant in the world for setting accounting standards? -International Accounting Standards Board (SAAB). Has, in recent years, come the dominant standard setting body in the world.

By 2005, over 7,000 companies had adopted FIRS, with more than 1 00 countries now requiring or permitting the use of Firms, or in the process of converging with the SAAB standards, at present and in the near future this means that hundreds of thousands of companies throughout the world will use either the full FIRS or the version for small and medium size enterprises. BEE -1 1 Explain the role of the Canadian Accounting Standards Board in establishing generally accepted accounting principles. The Accounting Standards Board of the CIA has primary responsibility for tenting GAP in Canada.

This is accomplished through a lengthy and complex process. Two basic premises underlie the process of establishing financial accounting standards: (1) the Scabs should respond to the needs and viewpoints of the entire economic community, not just the public accounting profession, and (2) it should operate in full public view through a “due process” system that gives interested persons enough opportunity to make their views known. The accounting standards oversight council oversees Scabs activities; its activities include setting the agenda and reporting to the public among other things.

BEE -12 What is the role of the Ontario Securities Commission (SOC) in standard setting? -The SOC reviews and monitors the financial statements of companies whose shares are publicly traded so that it can judge whether the statements present the financial position and results of operations of these companies fairly. It also issues its own disclosure requirements, which inform companies about how the SOC interprets GAP. Stock exchanges, as well as securities commissions, have the ability to fine a company and or delis the company’s shares from the stock exchange which removes a company’s access to capital markets.

BEE -13 What are some possible reasons why another organization, such as the SOC or the securities and Exchange Commission , should not issue financial reporting standards. One of the functions of the SOC and the SEC is to represent and protect the interests of investors. They do not represent the interests of different users of financial information. The CIA has since the early sass’s had the sole legislative and regulatory authority to set national private sector accounting standards in Canada. Starting in 2011 , the CIA has sole legislative and regulatory authority for private entity GAP and the SAAB has authority for

FIRS. This ensures that accounting standards have a high degree of acceptance from its broad community of constituents. BEE -14 What are the sources of pressure that change and influence the development Of accounting principles and standards? -Stakeholders: want particular economic events to be accounted for or reported in a particular way, and they fight hard to get what they want. They know that the most effective way to influence the standards that dictate accounting practice is to participate in formulating them or to try to influence or persuade the formulator. Politics: political nature has become more of an issue as more and more countries have adopted FIRS. BEE -15 Some individuals have argued that the Scabs and the International Accounting Standards Board need to be aware of the economic consequences of their pronouncements. What is meant by economic consequences? What are some dangers if politics play too much of a role in the development of financial reporting standards? -economic consequences: accounting standards can have detrimental impacts on the wealth levels of the providers of financial information. BEE -16 Some individuals have argued that all Canadian companies should allow the same set of accounting principles. Explain why there are multiple sets of standards in Canada. The users of financial information from public companies have different needs than the users of financial information from private companies. Public corporations need the opportunity to present financial information using consistent accounting rules as those used globally. To accomplish this, public companies need to follow the FIRS.

Doing so helps Canadian companies compete in a global market. Following this set of policies and standards is not essential to privately owned businesses whose less complex business models ND fewer number of financial statement users do not expect as extensive measurement and disclosure requirements as those required under FIRS. BEE ;17. If you were given complete authority to decide this, how would you propose that accounting principles or standards be developed and enforced? No one particular proposal is expected in answer to this question.

Your proposal, however, should be defensible relative to the following criteria: the method must be efficient, responsive and expeditious. The method must be free of bias and be above or insulated from pressure groups. The method just have legislative authority or otherwise command widespread support. The method must produce sound yet practicable accounting principles or standards. Your proposal might take the form of alterations of the existing methodology, an accounting court, or government device. BEE ;18. If you had to explain or define GAP, what essential characteristics would you include in your explanation?

The explanation should note that generally accepted accounting principles have substantial authoritative support. They consist of accounting practices, procedures, theories, and broad principles and conventions of general application, including underlying concepts and methods, which are recognized by a large majority of practicing accountants as well as other members of the business and financial community. GAP is divided into primary and other sources. Primary sources must be looked to first for how to treat an issue.

Where primary sources do not deal with the issue, the accounting policy selected must be consistent with the primary sources as well as developed through use of professional judgment in accordance with the conceptual framework. BEE -19. Plain the difference between primary and other sources of GAP. For public companies, GAP incorporates FIRS, AS and interpretations. For private companies, pension plans, and not-for-profit entities, primary sources of GAP include the accounting handbook sections 1400 to 3870, accounting guidelines, background information and illustrative material related to the previous items and implementation guides.

An entity should apply every primary source of GAP that deals with the accounting and reporting of transactions encountered by an entity. This means that primary sources must be looked to first. Where primary sources do not deal with a specific issue, the entity should then adopt accounting policies that are consistent with the primary sources away well as the Conceptual Framework. These other sources include for example accounting standards in other jurisdictions, such as U. S. FAST pronouncements or SAAB pronouncements. BE! -20.

The chairman of the Financial Accounting Standards Board at one time noted that “the flow of standards can only be slowed if (1) producers focus less on quarterly earnings per share and tax benefits and more on quality products, and (2) accountants and rely less on rules and law and more on professional judgment and conduct’. Explain his comment. The chairman of the FAST was indication that too much attention is put on the bottom line and not enough on the development of quality products. Managers should be less concerned with short-term results and be more concerned with the long-term results.

In addition, short term tax benefits often lead to long-term problems. The second part of his comment relates to accountants being overly concerned with following a set Of rules, so that if litigation ensues, they will be able to argue that they followed the rules exactly. The problem with this approach is that accountants often seem to ant more and more rules with less reliance on professional judgment. Less professional judgment leads to inappropriate use of accounting procedures in difficult situations. In the accountants’ defense, recent legal decisions have imposed vast new liability on accountants.

The concept of accountant’s liability that has emerged in these cases is broad and expansive; the number of classes of people to whom the accountant is held responsible is almost limitless. BEE -21. What is the difference between principles-based and rules-based accounting standards? In which category does RIFFS belong? Canadian private entity GAP? Explain. Principles-based standards are considered to be based on a conceptual framework and the accounting principles that result may require significant professional judgment in interpreting and applying the standards to ensure compliance.

Rules-based standards are generally quite detailed, and in many instances follow a “check-boss” mentality that some contend may shield accountants, auditors and companies from legal liability. FIRS and Canadian private entity GAP tend to be the principles-based standard-setting system, while U. S.. GAP is generally considered more rules-based. BEE -22. One writer recently noted that 99. 4% of all companies prepare statements that are in accordance with GAP. Why then is there such concern about fraudulent financial reporting?

Concern exists about fraudulent financial reporting because it can undermine the entire financial reporting process. Failure to provide information to users that is accurate can lead to inappropriate allocations of resources in our economy. In addition, failure to detect massive fraud can lead to additional governmental oversight of the accounting profession and financial reporting more generally. BEE -23. Some foreign countries have reporting standards that are different from standards in Canada.

What are some of the main reasons why reporting standards are often different among countries? Some of the reasons for difference include: 1 . The objectives of financial reporting often differ among countries. 2. The institutional structures are often not comparable. 3. Strong nationalist tendencies may be pervasive and therefore there is reluctance to adopt any one country’s approach. BEE-24. How are financial accountants pressured when they need to make ethical decisions in their work? Is having technical mastery of GAP enough o practice financial accounting?

Accountants must perceive the moral dimensions of some situations because GAP does not define or cover all specific features that are to be reported in financial statements. In these instances, accountants must choose among alternatives. These accounting choices influence whether particular stakeholders may be harmed or benefited. Ethical decision-making involves awareness of potential harm or benefit and taking responsibility for the choices which should always consider the public interest. BEE -25. What are some of the major challenges facing the accounting reversion?

Some major challenges facing the accounting profession relate to the following items: Credibility- how to regain public confidence in the aftermath of corporate fraud and poor reporting practices. Globalization of companies and capital markets- Canadian companies are operating and trading securities in global markets and are subject to accounting regulations In other jurisdictions. Canadian investors are investing in the global marketplace. Non-financial measurement- how to report significant key performance indicators such as customer satisfaction indexes, backlog information and eject rates on goods purchased.

Soft assets- how to report on intangible assets, such as market know-how, intellectual capital, market dominance, and well trained employees. Timeliness- how to report more reliable real-time information in the internet age. BEE -26. The Savages-Solely Act was enacted to combat fraud and curb poor reporting practices. What are some key provisions Of this legislation? Are these provisions in effect in Canada? The following are some of the key provisions of the Serbians-Solely Act (SOX), enacted in 2002: CLC Establishes an oversight board for accounting practices.

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