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Chapter+1with+answers - Chapter 1: The Canadian Financial...

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Chapter 1: The Canadian Financial Reporting Environment Read: Chapter 1 In-class exercise: BE1-2, BE1-3, BE1-8 Practice exercise: BE1-5, BE1-12, BE1-13, BE1-22 1
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Financial reporting is the process that communicates information about all business activities, in the forms of financial statements and other reports. Major financial statements include: Balance Sheet Income Statement (include comprehensive income) Statement of Cash Flows Statement of Shareholders’ (Owners’) Equity + Note Disclosures Other forms of financial reporting include: President’s letter Earning announcement News releases Stakeholders in Financial Reporting Stakeholders: parties who have something at stake in the financial reporting environment Key stakeholders include traditional users of financial information investors, creditors, auditors, regulators, analysts, management, standard setters, and others Broader definition of users is: anyone who prepares, relies on, reviews, audits, or monitors financial information 2
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Accounting and Capital Allocation Financial reporting aids users in the allocation of capital The accounting profession has the responsibility of measuring a company’s performance accurately, fairly, and on a timely basis These measurements enable investors and creditors to compare the income and assets employed by companies Investors can then assess the relative risks and returns associated with companies An effective process of capital allocation is critical to a healthy economy Unreliable information leads to poor capital allocation 3
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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 To increase manager’s personal compensation/wealth May disclose information to raise bid of friendly takeover or to discourage unfriendly takeovers To satisfy demands from financial analysts, activist groups 4
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Objectives of Financial Reporting Based on the IASB/FASB jointly published Exposure Draft, the overall objective is: To provide financial information that is useful to users and that is decision relevant. The statements should commuicate information about: 1. an entity’s economic resources and claims to those resources and
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Chapter+1with+answers - Chapter 1: The Canadian Financial...

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