INTERMEDIATE
ACCOUNTING
Sixth Canadian Edition
KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEK
Prepared by:
Gabriela H. Schneider, CMA; Grant MacEwan College
CHAPTER
1
The Canadian Financial
Reporting Environment
Learning Objectives
1. Describe the essential characteristics of
accounting.
2. Identify the major financial statements and
other means of financial reporting.
3. Explain how accounting assists in the
efficient use of scarce resources.
Learning Objectives
4. Explain the meaning of stakeholders and
identify the key stakeholders in financial
reporting.
5. Identify the objective of financial reporting.
6. Explain the notion of management bias
with respect to financial reporting.
7. Understand the importance of user needs
in the financial reporting process.
Learning Objectives
8. Explain the need for accounting standards.
9. Identify the major entities that influence
the standard-setting process and explain
how they influence financial reporting.
10. Explain the meaning of GAAP.
11. Explain the significance of professional
judgement in applying GAAP.
Learning Objectives
12. Understand issues related to ethics and
financial accounting.
13. Identify some of the challenges facing
accounting.
Financial Accounting and Accounting
Standards
Role of
Financial
Reporting
Financial
statements
and financial
reporting
Objectives of
Financial
Reporting
Management
bias
Accounting
and capital
allocation
Users needs
Stakeholders
Standard
Setting
GAAP
Need to develop
standards
GAAP
Hierarchy
Parties involved
in standard
setting
Professional
judgement
Standard setting
in a political
environment
Role of
Ethics
Challenges
Facing
Financial
Reporting
Characteristics of Financial
Accounting
• Accounting identifies, measures and
communicates financial information
• This information is about economic entities
• Information is communicated to interested
parties such as investors, creditors, unions
and governmental agencies
Financial Reporting
• Preparation of financial reports are used
by internal and external parties
• Contrasted with managerial accounting,
it uses financial information used by
management (internal users only)
• Financial reporting provides historical
information
Financial Reporting
• Major financial statements include:
–
–
–
–
the
the
the
the
balance sheet
income statement
statement of cash flows
statement of owners’ (or shareholders’) equity
• Other forms of financial reporting include:
–
–
–
–
–
annual report
prospectuses
government reporting
news releases
management forecasts
Flow of Information through the
Financial Statements
Income
Statement
Reports Net
Income
Statement of
Equity
Balance
Sheet
Ending
balance
reported
Change in cash as
reported displays the
change in cash
position
Statement of
Cash Flows
Accounting and the Efficient
Use of Scarce Resources
Financial Reporting aids users
in the allocation of scarce resources.
Accounting and the Efficient
Use of Scarce Resources
Financial
Reporting
aids
Users
(present and
potential) in
Capital
Allocation
decisions
Financial
Statements and
other forms of
financial
reporting
Users include:
investors,
creditors,
unions and
govt. agencies
Involves
determining
how funds are
allocated among
competing
interests
Stakeholders in Financial
Reporting
• Stakeholder: someone who prepares,
relies on, reviews, audits or monitors
financial information
• Includes both internal and external
parties
• Key stakeholders include:
– users of the financial information
– both internal and external parties
Objectives of Financial Reporting
• The CICA Handbook, Section 1000, par. 15
outlines the overall objective as:
The objective … is to communicate information that is
useful to … and other users in making their resource
allocation decisions and/or assessing management
stewardship. … financial statements provide information
about:
1. an entity’s economic resources, obligations and
equity/net assets;
2. changes in an entity’s economic resources,
obligations and equity/net assets; and
3. the economic performance of the entity
Objectives of Financial
Reporting
Resource Allocation Decisions
Was income
earned to
generate
future cash?
Yes
Able to meet
obligations and pay a
return on investment
Assess Management Stewardship
Did mgmt. decisions on
resource acquisition and
allocation increase
shareholder wealth?
Yes
Capital
continues to
be available
Investor & Creditor
confidence
continues
Management Bias
• Preparation of the financial statements are the
responsibility of internal management
• May lead to preparing statements that report the
enterprise in its best light
– This is the underlying principle of management bias
• Motives include:
– to reflect positive management stewardship
– meet financial analysts’ expectations, resulting in a
positive reaction in the capital markets
• What safeguards are in place to protect financial
users from management bias?
Understanding User Needs in
the Financial Reporting Process
Management
Prepare the
reports
Users
Use the reports to
acquire capital
Use the reports for
investment/lending
decisions
Financial
Statements
Aggressive Financial Reporting has a direct
impact on the users decision-making process
The Need for Accounting
Standards
• Standards are set to aid preparers and users of
financial statements
• They allow the preparers of the financial
statements to present fairly the enterprise
operations
• Presented to the users a single set of financial
statements to meet a majority of the user needs
• Standards are not rules, regulations, or laws
• They are intended to be generally accepted and
universally practiced
The Standard Setting Process:
Parties Involved
•Canadian Institute of
Chartered Accountants
(CICA)
•Accounting Standards
Board (AcSB) of the CICA
•Provincial Securities
Commission
•Ensure that companies
listed on the exchange
prepare their statements in
accordance with GAAP
•U.S. standard setting body;
SEC ensures compliance by
listed companies
•Financial Accounting
Standards Board (FASB) and
the Securities Exchange
Commission
•International Accounting
Standards Committee
(IASC)
–Primary responsibility for
setting GAAP
•Work toward eliminating
international reporting
standards
International Accounting
Standards
• The International Accounting Standards
Committee (IASC) was formed in 1973
• The objective was to narrow divergence in
international financial reporting
• There are many similarities between U.S. and
International accounting standards
• The concern is that international standards
may not be as rigorous as U.S. standards
Generally Accepted
Accounting Principles (GAAP)
• The profession has developed GAAP, which
present fairly, clearly and completely the
financial operations of the enterprise
• GAAP consist of authoritative
pronouncements issued by certain accounting
bodies
• CICA Handbook is the foremost source for
GAAP
GAAP and Other Authoritative
Pronouncements
• GAAP consist of FASB Standards and
Interpretations, APB Opinions and
AICPA Accounting Research Bulletins
• However, there are other documents
that are considered to provide
authoritative support
• See next slide for a hierarchy of these
pronouncements
The GAAP Hierarchy
Primary Source
Accounting recommendations covered in the
CICA Handbook
Secondary Source
Principles generally accepted by a significant
number of entities in Canada
Principles consistent with the CICA Handbook
and are developed through professional
judgement
Challenges Facing Accounting
•Globalization
•Technology
•New economy
•Accountability
A move to global markets and
global investors
Ability to produce, and
access, timely information
A move from the traditional
‘resource’ based to a
‘knowledge based’ economy
Driven by more sophisticated
and varied investors
The Impact of these Challenges
• Globalization
– Global market place requires information to be
‘globally’ comparative
– Global capital allocation: move from Canadian
stakeholders to global stakeholders
• Technology
– As the ability to produce information increases, the
need/demand for readily accessible information
increases
– Possible scenarios: Online real-time information
Continuous reporting
– Will annual financial statements fill the information
need?
The Impact of these Challenges
• New Economy
– Measuring and reporting ‘value creating
assets’ not currently being reported
– The challenge is to find an objective value,
and measure their impact on future
earnings
The Impact of these Challenges
• Accountability
– An ‘expectations gap’ exists between the
• public’s perception of the profession’s
accountability
• profession’s perception of its accountability to
the public
– Shift from traditional financial reporting to
business reporting
• e.g. internal financial controls; regulatory
compliance
– Balanced Scorecard model current move in this
direction
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