Chapter 1

Question 1

Financial accounting/reporting

Answer 1

process of preparing financial reports for external and internal users

Question 2

Primary objective of financial reporting

Answer 2

Aid current and potential users in their decision making, when lending money or investing in company

Question 3

financial reporting is mainly geared towards

Answer 3

external users

Question 4

Public Canadian companies use

Answer 4

IFRS, but if they traded on US exchange then they can use US GAAP or IFRS

Question 5

Non-public Canadian companies but with fiduciary responsibility (pension fund, mutual fund) must use

Answer 5

IFRS

Question 6

In Canada, private companies may apply

Answer 6

IFRS or ASPE

Question 7

ASPE

Answer 7

Accounting standards for private enterprises

Question 8

ASPE reports

Answer 8

1. Balance Sheet
2. Income Statement
3. Cash flows
4. Statement of retained earnings

Question 9

IFRS reports

Answer 9

1. Balance Sheet
2. Statement of Comprehensive income (NI + OCI)
3. Cash flows
4. Statement of changes in equity
5. Notes on financial statements

Question 10

Statement of changes in equity

Answer 10

Reconciliation of beginning and ending balances for all shareholder equity amounts – not just Retained Earnings

Question 11

Stakeholders that may have interest in statements

Answer 11

Investors, management, Securities commission, stock exchange, analysts, auditors, standard setters

Question 12

Accountant serious responsibility

Answer 12

provide relevant and reliable information + stewardship obligation + may have fiduciary responsibility

Question 13

stewardship obligation

Answer 13

they must ensure that company assets are safeguarded and put to the best possible use

Question 14

Auditors

Answer 14

add credibility to financial statements with independent verification of records and practices

Question 15

Audit risk

Answer 15

auditors cannot verify every single transaction

Question 16

Stakeholder of the company

Answer 16

someone who stands to lose something if company performs badly

Question 17

Limitations of financial statements

Answer 17

1. Based on information from the past

2. not geared toward a specific stakeholder

Question 18

Based on information of the past

Answer 18

past information may or may not be indicative of future events (may or may not be relevant)

Question 19

entity approach

Answer 19

A company’s assets are seen as separate and distinct from those of the stakeholders

Question 20

proprietary perspective

Answer 20

gear the financial statements towards a specific group

Question 21

Problems with proprietary perspective

Answer 21

unethical and unfair to the other stakeholders and may introduce bias in forming accounting policies

Question 22

Information asymmetry

Answer 22

not the same information for all investors

Question 23

efficient market hypothesis says

Answer 23

the price of a share reveals all the available information (not true usually)

Question 24

Theory of adverse selection

Answer 24

where information asymmetry exists, capital markets will attract companies that stand to gain by hiding information. Companies that fully disclose all information may have their share prices discounted and may thus be discouraged from entering the capital markets in the first place.

Question 25

Theory of moral hazard

Answer 25

People will do whatever is in their best interests regardless of the harm it can cause others

Question 26

management bias

Answer 26

may result in overstating assets and revenues if a manager’s bonus is at stake by adopting aggressive accounting policies.

Question 27

Management bias can result from

Answer 27

use of financial statements to:

1. evaluate manager’s performance
2. evaluate compensation
3. influence stock price
4. determine if debt covenants were violated

Question 28

Standard Setting

Answer 28

GAAP (Generally Accepted Accounting principles) come about due to authoritative/pronouncements/standards OR commonly accepted practices

Question 29

Standard setting in Canada

Answer 29

1. Canadian Accounting Standards Board (AcSB)

2. International Accounting Standards Board (IASB)

Question 30

International Accounting Standards Board (IASB)

Answer 30

Responsible for IFRS: Public companies in Canada have adopted IFRS since January 1, 2011.

Question 31

Canadian Accounting Standards Board (AcSB)

Answer 31

Responsible for ASPE, to set standards they seek to be responsive to the needs of the community and operate in full public view throughout due process

Question 32

Mission of IASB

Answer 32

to bring transparency, accountability and efficiency to financial markets around the world by developing IFRS Standards. Our work serves the public interest by fostering trust, growth and long-term financial stability in the global economy

Question 33

US accounting standards

Answer 33

FASB: Federal Accounting standards board, Note that U.S. GAAP standards are already converged with IFRS

Question 34

Securities and exchanges commissions

Answer 34

These are provincial bodies in Canada with the largest being the Ontario Securities & Exchange Commission. In the U.S., the Securities & Exchange Commission (SEC) is a federal body.
Will comment on standards but cannot make them

Question 35

US GAAP based on

Answer 35

rules for every situation, if IFRS cannot guide on what to do many will rely on US GAAP

Question 36

IFRS and ASPE based on

Answer 36

general principles, allowing more leeway for interpretation

Question 37

Hierarchy to GAAP

Answer 37

Under IFRS and ASPE, there is a hierarchy: primary or other

Question 38

For AcSB primary sources

Answer 38

1. CPA handbook

2. Accounting Guidelines and Appendices

Question 39

For IASB, primary sources are

Answer 39

1. IFRS standards
2. IAS (pre-IFRS) standards
3. IFRIC : International Financial Reporting Interpretations Committee

Question 40

Some other sources for IFRS and ASPE

Answer 40

1. Background information on AcSb or IASB
2. Pronouncements by other standard setting bodies
3. Draft primary sources
4. Research studies
5. Textbooks
6. Industry Practice

Question 41

If there is no guidance for a certain issue then

Answer 41

professional judgement is applied

Question 42

Market oversight

Answer 42

Sarbanes Oxley (SOX) Act was passed in the U.S. in 2002, giving much more policing authority to the SEC for public companies.

Question 43

Key elements of SOX are

Answer 43

1. Stronger independent rules for auditors
2. Creation of oversight board (CPAOB)
3. CEOS and CFOs must sign off on the statements or they risk losing their bonuses.
4. • Audit committees must have independent members with financial expertise
5. companies must disclose their codes of ethics

Question 44

the Canadian Public Accountability Board (CPAB)

Answer 44

Canada’s version of SOX, but Canadian companies that issue shares in the US are bound by SOX

Question 45

Politics of Standard setting

Answer 45

1. Standard-setting bodies like the IASB have an obligation to remain impartial and do what’s best for the economy, and be ethical and unbiased.
2. funding it receives is broad-based, “strings-free” and from multiple nations to minimize the likelihood of favouring any one user group.

Question 46

Ethics

Answer 46

Accountants are entrusted by the public and expected to be ethical –> ignore biases and pressures

Question 47

Impact of technology

Answer 47

quick access to information, but not everyone can have the same information bc there is so much,
Often unaudited so is it reliable.

Question 48

Integrated reporting

Answer 48

Not just financial reporting but (IIRC) more comprehensive model of reporting: management information, sustainability, governance and compensation with it. The idea is to see financial information as part of a bigger picture.