AFM 191 - CHP. 1.1 - accounting standards

Question 1

Define a private company

Answer 1

a business that has not issued shares or debt in public financial markets

Question 2

Define a public company

Answer 2

a business that has issues shares or debt in public financial markets

Question 3

what’s an example of a public financial market

Answer 3

Toronto stock exchange (TSX)

Question 4

What’s the importance of accounting information system in business?

Answer 4

ensures that business events are accurately presented in the company’s financial statements

Question 5

Why are financial statements important in business?

Answer 5

financial statements are used to make decision, evaluate business’ performance, and inform internal/external stakeholders.

Question 6

Who are internal stakeholders?

Answer 6

executive teams, management teams, private investors, board of directors

Question 7

who are external stakeholders?

Answer 7

public investors (shareholders), lending institutions, government + regulatory bodies

Question 8

What are the accounting standards when reporting to internal stakeholders?

Answer 8

report does not need to follow generally accepted accounting standards.

Question 9

What are the accounting standards when reporting to external stakeholders?

Answer 9

report must follow genrally accepted accounting standards

Question 10

What are some examples of generally accepted accounting standards

Answer 10

ASPE or IFRS

Question 11

What’s the level of detail need when reporting to internal stakeholders and why?

Answer 11

detailed reporting + in-depth analysis to support internal decision making and summary data with relatively less detail

Question 12

What’s the level of detail need when reporting to external stakeholders?

Answer 12

Summary data with relatively less detail

Question 13

How frequent are reports made to internal stakeholders?

Answer 13

monthly, quarterly, and annually

Question 14

how frequent are reports made for external stakeholders?

Answer 14

quarterly and annually

Question 15

what comparisons are made in the reports for internal stakeholders?

Answer 15

actual results vs. budget/forecast and actual results vs. prior year

Question 16

What comparisons are made in reports for external stakeholders

Answer 16

actual results vs prior year

Question 17

Why is accounting info important to internal stakeholders?

Answer 17

without accounting info, they cannot make effective business decision or obtain capital from investors + banks to continuously grow the business

Question 18

Whys is accounting info important to external stakeholders

Answer 18

they require this info to decide if they should invest in a business or lend money to a business

Question 19

define a stakeholder

Answer 19

a party that has an interest in a company and can either affect or be affected by the business

Question 20

define an internal stakeholder

Answer 20

individuals or parties that have access to internal company info and drive the business forward through internal decision-making

Question 21

Define an external stakeholder

Answer 21

individuals or parties that rely on info provided by the company to make external decisions

Question 22

What do Generally accepted accounting principles (GAAP) represent?

Answer 22

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.

Question 23

with GAAP, what judgement must be used for these principles?

Answer 23

professional judgement

Question 24

What does ASPE stand for?

Answer 24

Accounting standards for Private Enterprise

Question 25

what’s’ the use of ASPE

Answer 25

GAAP used to prepare financial statement for private companies

Question 26

What does IFRS stand for?

Answer 26

International Financial Reporting Standards

Question 27

What’s the use of IFRS?

Answer 27

GAAP used to prepare financial statement for public companies

Question 28

Why might some private companies adopt ASPE and not IFRS? and vice versa?

Answer 28

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.

Question 29

What GAAP frameworks do public companies have?

Answer 29

IFRS

Question 30

What GAAP frameworks do private companies have?

Answer 30

ASPE or IFRS

Question 31

Define the Accounting Standards board (AcSB)

Answer 31

an independent body with the authority to establish accounting standards for use by all Canadian entities

Question 32

Define accounting standards

Answer 32

specify how transaction and other events are to be recognized, measured, presented, and disclosed in financial statements

Question 33

What does the AcSB approve?

Answer 33

approves accounting standards for private and public companies

Question 34

What’s the objective of accounting standards?

Answer 34

provide financial info to investors, lenders, creditors, contributors, and other that is use in making decision about provide resources to the company

Question 35

What’s the main role of AcSB

Answer 35

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.

Question 36

Define the conceptual framework that the AcSB provides

Answer 36

the conceptual framework that facilitates the consistent + logical formulation of standards + provides a basis for the use of judgement in resolving accounting issues.

Question 37

What does GAAP help to ensure?

Answer 37

ensures the financial position of a company represents an accurate picture of the company’s financial performance

Question 38

What are the goals of internal financial reports

Answer 38

to understand business’ performance

Question 39

What measures are appropriate for internal decision-making?

Answer 39

GAAP and non-GAAP measures

Question 40

What’s an example of a non-GAAP earning measure in internal reports?

Answer 40

EBITDA - earnings before interest, taxes and depreciation/amortization

Question 41

What 4 qualitative characteristics of financial info statements in ASPE are needed to be useful?

Answer 41

1. understandability
2. relevance
3. reliability
4. comparability

Question 42

define understandability in teh context of ASPE

Answer 42

Users must be capable of understanding the info provided in financial statements - users are assumed to have reasonable understanding of business + accounting

Question 43

define relevance in context of ASPE

Answer 43

info provided in financial statement is relevant is it can influence users’ decision by helping them evaluate the impact of business transactions

Question 44

define reliability in the context of ASPE

Answer 44

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

Question 45

Define comparability in the context of ASPE

Answer 45

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.

Question 46

What are the 3 assumptions made to prepare external financial reports

Answer 46

1. going concern assumption
2. separate-entity assumption
3. historical cost assumption

Question 47

Define the going concern assumption in the context of external financial reporting

Answer 47

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.

Question 48

Define the separate-entity assumption in the context of external financial reporting

Answer 48

the transaction that occur in the company, relates to the business it operates in. (must exclude personal transaction)

Question 49

Define the historical cost assumption in the context of external financial reporting

Answer 49

business transactions are primarily recorded at cost.

Question 50

what’s a notable exception to external financial statements

Answer 50

supplementary notes AKA notes to financial statements. company may disclose more detailed info

Question 51

Define month-end close

Answer 51

monthly financial reports for internal stakeholders

Question 52

define a fiscal year

Answer 52

12-month period that companies use for reporting and budgeting

Question 53

Define budgets and forecasts

Answer 53

estimates of the results management teams believe the company will achieve.

Question 54

Why do internal stakeholders need to evaluate performance by company actual against prior year results

Answer 54

they need to understand company growth and changes on a year-over-year basis

Question 55

Define GAAP

Answer 55

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.