Acct 351 Chapter 01

Question 1

Accounting Standards Board (AcSB)

Answer 1

The group primarily responsible for setting GAAP in Canada, and publishers of the CICA Handbook among other authoritative documents.

Question 2

Accounting Standards Oversight Council (AcSOC)

Answer 2

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

Question 3

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

Answer 3

The main professional accounting body for Chartered Accountants. Unlike their US counterpart (AICPA), the CICA has primary responsibility for setting GAAP in Canada.

Question 4

capital allocation

Answer 4

The process by which accounting enables investors and creditors to assess the relative returns and risks associated with investment opportunities and thereby channel resources more effectively.

Question 5

CICA Handbook

Answer 5

A set of rules and guidelines for accounting and assurance.

Question 6

due process

Answer 6

The method used by the CICA in order to ensure that it operates in full view of the public by giving those that are interested ample opportunity to make their views known.

Question 7

EIC Abstracts

Answer 7

Interpretations of the standards in the CICA Handbook as well as guidelines on issues that cannot be dealt with in the Handbook. These abstracts are incorporated into the CICA Handbook

Question 8

Emerging Issues Committee (EIC)

Answer 8

A standing committee, established by the AcSB to react quickly to current financial reporting issues.

Question 9

ethical dilemmas

Answer 9

Problems where there are no set guidelines to follow in order to resolve a situation. These are the grey areas that one has to ask “Is it right or wrong?”

Question 10

financial accounting

Answer 10

The process that culminates in the preparation of financial reports for the enterprise as a whole for use by both internal and external parties. (Synonym: Financial reporting)

Question 11

Financial Accounting Standards Board (FASB)

Answer 11

The major standard-setting body in the U.S.

Question 12

financial reporting

Answer 12

The process that culminates in the preparation of financial reports for the enterprise as a whole for use by both internal and external parties. (Synonym: Financial accounting)

Question 13

financial statements

Answer 13

The principal means through which financial information is communicated to those outside an enterprise. They provide a firm’s history, quantified in money terms.

Question 14

GAAP hierarchy

Answer 14

The process by which GAAP is the primary source of accounting recommendations. Where the italics in the CICA Handbook are lacking in guidance, there are two secondary sources: i) financial statements of other Canadian companies, and ii) professional judgement.

Question 15

generally accepted accounting principles (GAAP)

Answer 15

The common set of standards and procedures used to prepare financial statements with the expectation that the majority of users’ needs will be met.

Question 16

IASC Foundation

Answer 16

The group that monitors, reviews, appoints members to, and funds the IASB.

Question 17

International Accounting Standards Board (IASB)

Answer 17

A group created in 2001 by the IASC, with a goal to increase the transparency of financial reporting by achieving a single, global method of accounting.

Question 18

International Financial Reporting Interpretation Committee (IFRIC)

Answer 18

A committee that studies and provides recommendations on issues where IASB guidance is insufficient or does not exist

Question 19

International Financial Reporting Standards (IFRS)

Answer 19

The internationally recognized common set of standards and procedures; also known as international GAAP.

Question 20

management bias

Answer 20

Where management presents information about their company in its best light (aggressive financial reporting) in order to make their company look as successful as possible.

Question 21

management stewardship

Answer 21

Management’s responsibility to manage assets with care and trust, which is described as its fiduciary relationship.

Question 22

managerial accounting

Answer 22

The process of identifying, measuring, analyzing, and communicating financial information to internal decision-makers.

Question 23

objective of financial reporting

Answer 23

As laid out in the CICA Handbook: “to communicate information that is useful to investors, member, contributors, creditors, and other users in making their resource allocation decisions and/or assessing management stewardship.”

Question 24

Ontario Securities Commission (OSC)

Answer 24

A group that regulates companies listed on the TSE by reviewing and monitoring the financial statements with the view to assessing whether the statements present fairly the financial position and results of operations.

Question 25

Professional judgement

Answer 25

Professional accountants with significant education and experience who will be able to apply the Handbook’s “general principles” appropriately as they see fit. This is important in Canada because Canadian standards are based primarily on general principles rather than specific rules, because the basic philosophy of Canadian accounting is that there cannot be a rule for every situation.

Question 26

provincial securities commissions

Answer 26

The group that oversees and monitors the provincial capital market places. They ensure that the participants in the capital markets adhere to securities law/legislation, ensuring that the marketplace is fair.

Question 27

Securities and Exchange Commission (SEC)

Answer 27

The US counterpart of the OSC, which supports the FASB by indicating that financial statements conforming with FASB standards will be presumed to have substantial authoritative support

Question 28

stakeholders

Answer 28

Are the parties who have something at risk in the financial reporting environment

Question 29

Standards Advisory Council (SAC)

Answer 29

A body comprised of various user groups that provides guidance and feedback to the IASB.

Question 30

Toronto Stock Exchange (TSX)

Answer 30

The largest stock exchange in Canada.

Question 31

Describe the essential characteristics of accounting

Answer 31

The essential characteristics of accounting are the (1) identification, measurement, and communication of financial information about (2) economic entities to (3) interested persons.

Question 32

Explain how accounting makes it possible to use scarce resources more efficiently.

Answer 32

Accounting provides reliable, relevant, and timely information to managers, investors, and creditors so that resources are allocated to the most efficient enterprises. Accounting also provides measurements of efficiency (profitability) and financial soundness.

Question 33

Explain the meaning of “stakeholder” and identify key stakeholders in financial reporting including what is at stake for each one.

Answer 33

Investors, creditors, management, securities commissions, stock exchanges, analysts, credit rating agencies, auditors, and standard setters are some of the major stakeholders.

Question 34

Identify the objective of financial reporting.

Answer 34

The objective of financial statements is to communicate information that is useful to key decision-makers such as investors and creditors in making resource allocation decisions (including assessing management stewardship) about the resources and claims to resources of an entity and how these are changing.

Question 35

Explain the notion of management bias in financial reporting.

Answer 35

Management bias implies that the financial statements are not neutral: in other words, the preparers of the financial information are presenting the information in a manner that may overemphasize the positive and underemphasize the negative.

Question 36

Understand the importance of user needs in the financial reporting process.

Answer 36

The financial reporting process is based on ensuring that users receive information that is relevant to decisions. This is a challenge as different users have different knowledge levels and needs. Management bias can make financial information less useful.

Question 37

Explain the need for accounting standards.

Answer 37

The accounting profession has tried to develop a set of standards that is generally accepted and universally practised. Without this set of standards, each enterprise would have to develop its own standards, and readers of financial statements would have to become familiar with every company’s particular accounting and reporting practices. As a result, it would be almost impossible to prepare statements that could be compared.

Question 38

Identify the major entities that influence the standard-setting process and explain how they influence financial reporting.

Answer 38

The AcSB is the main standard-setting body in Canada for private companies, pension plans, and not-for-profit entities. Its mandate is from the CBCA as well as provincial acts of incorporation. For public companies, GAAP is IFRS as established by the IASB. Public companies are required to follow GAAP in order to access capital markets, which are monitored by provincial securities commissions. The FASB is also important as it influences IFRS standard setting.

Question 39

Explain the meaning of generally accepted accounting principles (GAAP).

Answer 39

Generally accepted accounting principles are either principles that have substantial authoritative support, such as the CICA Handbook, or those arrived at through the use of professional judgement and the conceptual framework.

Question 40

Explain the significance of professional judgement in applying GAAP.

Answer 40

Professional judgement plays an important role in Canadian GAAP since much of GAAP is based on general principles, which need to be interpreted

Question 41

Understand issues related to ethics and financial accounting.

Answer 41

When performing their professional duties, financial accountants are expected to note moral considerations and to make ethical decisions. Doing this is more difficult because no consensus has emerged among business professionals as to what constitutes a comprehensive ethical system.

Question 42

Identify some of the challenges facing accounting.

Answer 42

Some of the challenges are globalization, leading to a requirement for international harmonization of standards; increased technology, resulting in the need for more timely information; the move to a new economy, resulting in a focus on measuring and reporting non-traditional assets that create value; and an increased requirement for accountability, resulting in the creation of new measurement and reporting models that look at business reporting as a whole.