AFM 191 - CHP. 1.1 - accounting standards Flashcards
Define a private company
a business that has not issued shares or debt in public financial markets
Define a public company
a business that has issues shares or debt in public financial markets
what’s an example of a public financial market
Toronto stock exchange (TSX)
What’s the importance of accounting information system in business?
ensures that business events are accurately presented in the company’s financial statements
Why are financial statements important in business?
financial statements are used to make decision, evaluate business’ performance, and inform internal/external stakeholders.
Who are internal stakeholders?
executive teams, management teams, private investors, board of directors
who are external stakeholders?
public investors (shareholders), lending institutions, government + regulatory bodies
What are the accounting standards when reporting to internal stakeholders?
report does not need to follow generally accepted accounting standards.
What are the accounting standards when reporting to external stakeholders?
report must follow genrally accepted accounting standards
What are some examples of generally accepted accounting standards
ASPE or IFRS
What’s the level of detail need when reporting to internal stakeholders and why?
detailed reporting + in-depth analysis to support internal decision making and summary data with relatively less detail
What’s the level of detail need when reporting to external stakeholders?
Summary data with relatively less detail
How frequent are reports made to internal stakeholders?
monthly, quarterly, and annually
how frequent are reports made for external stakeholders?
quarterly and annually
what comparisons are made in the reports for internal stakeholders?
actual results vs. budget/forecast and actual results vs. prior year
What comparisons are made in reports for external stakeholders
actual results vs prior year
Why is accounting info important to internal stakeholders?
without accounting info, they cannot make effective business decision or obtain capital from investors + banks to continuously grow the business
Whys is accounting info important to external stakeholders
they require this info to decide if they should invest in a business or lend money to a business
define a stakeholder
a party that has an interest in a company and can either affect or be affected by the business
define an internal stakeholder
individuals or parties that have access to internal company info and drive the business forward through internal decision-making
Define an external stakeholder
individuals or parties that rely on info provided by the company to make external decisions
What do Generally accepted accounting principles (GAAP) represent?
These principles represent the accounting framework that is followed by private + public companies to provide external financial statements users with high-quality info about the company’s performance reported by the company.
with GAAP, what judgement must be used for these principles?
professional judgement
What does ASPE stand for?
Accounting standards for Private Enterprise
what’s’ the use of ASPE
GAAP used to prepare financial statement for private companies
What does IFRS stand for?
International Financial Reporting Standards
What’s the use of IFRS?
GAAP used to prepare financial statement for public companies
Why might some private companies adopt ASPE and not IFRS? and vice versa?
adopting ASPE if the private company doe snot plan to access public equity or debt market as it is simpler and has a less demanding disclosure requirements than IFRS.
Adopting IFRS if the private company plans to access public equity or debt markets in the future to ease their potential future transition from private to public company.
What GAAP frameworks do public companies have?
IFRS
What GAAP frameworks do private companies have?
ASPE or IFRS
Define the Accounting Standards board (AcSB)
an independent body with the authority to establish accounting standards for use by all Canadian entities
Define accounting standards
specify how transaction and other events are to be recognized, measured, presented, and disclosed in financial statements
What does the AcSB approve?
approves accounting standards for private and public companies
What’s the objective of accounting standards?
provide financial info to investors, lenders, creditors, contributors, and other that is use in making decision about provide resources to the company
What’s the main role of AcSB
develops and maintains Canadian accounting standards to support informed economic decision making by financial statement users through maintaining a conceptual framework that provides a high-quality info about financial performance reported by Canadian companies.
Define the conceptual framework that the AcSB provides
the conceptual framework that facilitates the consistent + logical formulation of standards + provides a basis for the use of judgement in resolving accounting issues.
What does GAAP help to ensure?
ensures the financial position of a company represents an accurate picture of the company’s financial performance
What are the goals of internal financial reports
to understand business’ performance
What measures are appropriate for internal decision-making?
GAAP and non-GAAP measures
What’s an example of a non-GAAP earning measure in internal reports?
EBITDA - earnings before interest, taxes and depreciation/amortization
What 4 qualitative characteristics of financial info statements in ASPE are needed to be useful?
- understandability
- relevance
- reliability
- comparability
define understandability in teh context of ASPE
Users must be capable of understanding the info provided in financial statements - users are assumed to have reasonable understanding of business + accounting
define relevance in context of ASPE
info provided in financial statement is relevant is it can influence users’ decision by helping them evaluate the impact of business transactions
define reliability in the context of ASPE
has to include the following elements:
1. represents the underlying economics activity of the transaction and events that have been recognized
2. can be verified
3. free from error and bias
Define comparability in the context of ASPE
users should be able to identify similarities and differences between info provided by 2 sets of financial statements.
users should be able to compare the financial statements of 2 diff. companies and compare financial statements of same company over multiple periods of time.
What are the 3 assumptions made to prepare external financial reports
- going concern assumption
- separate-entity assumption
- historical cost assumption
Define the going concern assumption in the context of external financial reporting
company will continue to operate in the future years. business has no intention of ending its operations and has the ability to continue operating into the foreseeable future.
Define the separate-entity assumption in the context of external financial reporting
the transaction that occur in the company, relates to the business it operates in. (must exclude personal transaction)
Define the historical cost assumption in the context of external financial reporting
business transactions are primarily recorded at cost.
what’s a notable exception to external financial statements
supplementary notes AKA notes to financial statements. company may disclose more detailed info
Define month-end close
monthly financial reports for internal stakeholders
define a fiscal year
12-month period that companies use for reporting and budgeting
Define budgets and forecasts
estimates of the results management teams believe the company will achieve.
Why do internal stakeholders need to evaluate performance by company actual against prior year results
they need to understand company growth and changes on a year-over-year basis
Define GAAP
principle=based standards and not rule-based standards that public ad private companies follow to prepare financial statement. since these are principal based, professional judgement must be applied to make choices in the accounting treatment of business events and transactions.
