Lecture+Note+Chapter+1+with+answers

Lecture+Note+Chapter+1+with+answers - Chapter 1: The...

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Chapter 1: The Canadian financial reporting environment Practice exercises: WA1-1, WA 1-3, WA1-6 Examples for Question #5: Voluntary Information Letter to Shareholders: Berkshire Hathaway http://www.berkshirehathaway.com/letters/letters.html News Release: New geographic location http://www.montrealgazette.com/Hyundai+ponders+assembly+plant+Canada/1991902/stor y.html 1
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1) Role of financial reporting What is the role of financial reporting a capitalist economy? Provide info to help mkts attain efficient allocation of capital necessary for healthy economy Investors/creditors use info to assess RISK & RETURN & allocate resources to different firms based on assessments Unreliable/irrelevant info → poor allocation What is the difference between “financial statements” and “financial reporting”? “Financial reporting” includes other items such as MD&A, supporting schedules, historical summaries, report on environmental impact, etc. 2
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2) Demand for financial information What is meant by calling someone a “stakeholder” in the financial reporting environment? A party who has something at risk in the FR environment Explain why would each of the following groups would need financial information and have a stake in financial reporting. Company’s Existing Shareholders Should they continue to hold shares, sell or buy more? For assessing management performance (compensate, fire) Prospective Investors Financial Analysts Job is to use information for making recommendations Auditors Job is to certify fairness of information Managers Compensation depends on information Need information about competitors 3
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Employees Information used in bargaining for wages, profit sharing, pension plans Lenders Determine rate, collateral, risk of loan Monitor compliance with debt covenants Suppliers Debt-rating Agencies To evaluate firm’s future cash flows, assess risk Government Regulatory Agencies Taxation, setting regulated rates 4
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3) Supply of financial information What incentives would managers have to disclose some financial information Voluntarily? To reassure debt & equity markets Firms compete to pay lowest rate, more information may reduce investors’ perception of firm’s risk To improve manager’s worth in managerial labour market May disclose information to raise bid of friendly takeover or to discourage unfriendly takeovers To satisfy demands from financial analysts, activist groups List ways in which managers sometimes voluntarily provide information about the firm to outsiders. Letter to shareholders Provide forecasts of sales, earnings News releases Capital expenditure plans Announce reorganizations, plans to discontinue operations Announce plans for new debt/equity offerings 5
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information to outsiders.
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Lecture+Note+Chapter+1+with+answers - Chapter 1: The...

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