How does accounting help the capital allocation process?
BE1-1
Capital allocation is the process by which investors and auditors decide who they will
... [Show More] give their money to in order to KEEP IT SAFE and to EARN RETURNS. Accounting measures the RISK and RETURN of alternative investments so that we can compare in order to MAXIMIZE RETURN and MINIMIZE RISK.
Identify at least three major stakeholders that use financial accounting information and briefly explain how these stakeholders might use the information from financial statements.
BE1-2
A stakeholder is someone who is affected by the financial results of the reporting company.
Ex: INVESTORS/CREDITORS - they measure risk and returns of the past in order to PREDICT THE FUTURE RETURNS or decide on DISTRIBUTION OF CAPITAL.
Ex: Credit Rating Agencies - they want to give useful and reliable advice for making investment decisions.
Ex: Management - for deciding performance incentives, or whether to keep certain people in certain positions.
Ex: Accountants - providing useful information with good and comparable rules makes the job more valuable.
Ex: Tax Authorities - they want to be able to evaluate taxes and see if everyone's paying their fair share.
What are the major objectives of financial reporting?
BE1-3
(1) Provide information to users that lets them make better decisions - such as (2) Investment decisions (for investors and creditors) and (3) Performance evaluations (bonus or boot); to make changes in (4) Assets and Liabilities (Balance Sheet accounts) due to changes in (5) Assets, Liabilities, and Equity (Income Statement accounts/Statement of Owner's Equity accounts).
What is the value of having a common set of standards in financial accounting and reporting?
BE1-6
Having a common set of standards (GAAP), that is a set of rules/principles/definitions/formats is useful because:
(1) MAKES it EASIER to COMPARE businesses to MAXIMIZE RETURNS and MINIMIZE RISK for investors/creditors.
(2) Reduces the cost of reporting.
(3) Reduces the cost and effort to train accountants.
(4) Makes reports easier for users to understand.
What is the likely limitation on "general-purpose financial statements"?
BE1-7
General Purpose Financial Statements are those that GAAP says must be made public. Limits are: (1) Everyone must receive the same financial statements so the company cannot give all users exactly what they want. (2) Company cannot give information to only those who want or need it.
Which organization is currently dominant in the world for setting accounting standards?
BE1-9
There are 2 organizations that dominate: IASB and FASB. IASB sets IFRS, and FASB sets US GAAP. To a large extent, IFRS and US GAAP agree.
Explain the role of the Canadian Accounting Standards Board (AcSB) in establishing generally accepted accounting principles.
BE1-10
AcSB is the Canadian AccountingStandards board, AcSB essentially rubberstamps IFRS for use in Canada, and they also set GAAP in Canada (ASPE) - where a practice is confusing or expensive in IFRS, it is changed for ASPE. A practice may become GAAP by being written down by AcSB or by coming up as a standard practice in the field.
What is the role of the Ontario Securities Commission (OSC) in standard setting?
BE1-11
OSC makes the rules for public companies, passing down AcSB rules. OSC puts those rules into law and enforces them.
What are some possible reasons why another organization, such as the OSC or the Securities and Exchange Commission (SEC), should not issue financial reporting standards?
BE1-12
OSC serves a policing role. Just as we do not want police creating the rules they enforce, we also don't want OSC to make the rules as this generally leads to the tendency of making rules that are inefficient but easy to enforce.
Some individuals have argued that all Canadian companies should follow the same set of accounting principles. Explain why there are multiple sets of standards in Canada.
BE1-15
There are 2 GAAPs in Canada - ASPE and IFRS. Why ASPE when IFRS already exists? Because the cost of complying with IFRS can be prohibitive to small, private companies. The major benefit of IFRS is the ability to raise foreign investment, but (1) users of public and private company information are different and (2) you do not need to compare public and private companies. (3) ASPE is cheaper and easier for private companies (better cost/benefit ratio) and (4) ASPE is easier to explain to unsophisticated users, such as sole proprietors. [Show Less]