Ch. 1

Question 1

GAAP

Answer 1

Generally Accepted Accounting Principles. A company’s management prepares financial statements, in accordance with GAAP set by accounting standard-setting bodies, primarily to assist users in making efficient resource (or capital) allocation decisions.

Question 2

Why do Investors care?

Answer 2

Investors need information about the past performance of a company in order to determine whether they should invest in the company. Financial statements should provide information about whether the company is profitable, whether it has paid dividends in the past, and whether it can stay solvent.

Question 3

Information Asymmetry

Answer 3

For the most efficient and effective flow of capital, there should be information asymmetry, meaning that all stakeholders should have equal access to all relevant information.

Question 4

Two most common types of information asymmetry problems are …

Answer 4

Adverse Selection and Moral Hazard.

Question 5

Adverse Selection

Answer 5

occurs when there’s a lack of symmetric information prior to a deal between a buyer and a seller.

Question 6

Moral Hazard

Answer 6

is a concept that notes that people will often shirk their responsibility if they think that no one is watching.

Question 7

GAAP is codified in the CPA Canada Handbook for …

Answer 7

publicly accountable enterprises, private enterprises, pension plans, and not-for-profit entities.

Question 8

“IFRS” is understood to comprises both

Answer 8

IFRS and IAS

Question 9

IAS

Answer 9

the predecessor International Accounting Standards Committee.

Question 10

No specific rule can be phrased to suit every situation, the guidelines in … (2)

Answer 10

IFRS and ASPE are quite often general in nature and usually provide basic principles.

Question 11

Traditional Earning Approach

Answer 11

suggests that revenue should be recognized when performance is substantially complete and collection is reasonably assured.

Question 12

Contract-Based Approach

Answer 12

An alternative to the earnings approach to revenue recognition, which addresses some of the subjectivity in applying the earnings approach.

Question 13

For private enterprises, the primary sources of GAAP are as follows: (2)

Answer 13

CPA Canada Handbook, and

Accounting guidelines

Question 14

For publicly accountable entities, the primary sources of GAAP are as follows: (2)

Answer 14

IFRS
IAS
IFRIC interpretations

Question 15

Potential MANAGEMENT BIAS

Answer 15

may play a key role in the development and choose of accounting policies chosen by management.

Question 16

Stewardship function

Answer 16

measuring and reporting data to absentee owners. This is an important function of accounting.

Question 17

Principles and Standards

Answer 17

term used interchangeably in practice and throughout this book.

Question 18

IASB International Accounting Standards Board

Answer 18

is quickly becoming the dominant accounting standard-setting body in the world, full global adoption of international GAAP and IFRS is still far away.

Question 19

Basic Financial Statements are: (4)

Answer 19

(1) the statement of financial position (or the balance sheet under ASPE),
(2) the statement of income/comprehensive income (or the income statement under ASPE),
(3) the statement of cash flows, and
(4) the statement of changes in equity (or statement of retained earnings under ASPE).

Question 20

Accrual Basis of Accounting is used in preparing the basic financial statements. It requires 2 things:

Answer 20

The accrual basis requires

(1) reporting revenues in the period in which they are earned (which may not be the same period in which the related cash is received), and
(2) reporting expenses in the period in which they are incurred (which may not be the same period in which the related cash is paid).

Question 21

Auditors add value because

Answer 21

they perform an independent review of financial statements, providing assurance that GAAP has been followed.

Question 22

Define GAAP:

Answer 22

The accounting profession refers to common accounting standards and procedures as generally accepted accounting principles (GAAP). The word “principles” refers to methods or procedures or standards. The phrase “generally accepted” means having “substantial authoritative support.” A method has substantial authoritative support if a rule-making body has approved it or if it has gained acceptance over time because of its universal application in practice.

Question 23

List the primary sources of IFRS

Answer 23

The primary sources of IFRS (where one should look first for guidance in applying GAAP for pub- licly accountable enterprises) are the following:
• IFRS
• IAS
• IFRIC (International Financial Reporting Interpretation Committee) and SIC interpretations