TEXT BOOK NOTES

TEXT BOOK NOTES - CACC414 CH01_02 3 ESSENTIAL ACCOUNTING...

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CACC414 CH01_02 3 ESSENTIAL ACCOUNTING CHARACTERISTICS: 1. Identification 2. Measurement 3. communication of financial information about entities to interested persons . MEASURING COMPANY PERFORMANCE FINANCIAL STATEMENTS AND FINANCIAL REPORTING Managerial accounting is the process of (1) identifying (2) measuring and (3) communicating financial information to internal decision makers through 1. cost-benefit analysis 2. forecasts used to (1) plan (2) evaluate and (3) control an organization’s operations Financial accounting/reporting is the process that culminates in the preparation of financial reports that: 1. cover all the enterprise’s business activities 2. are used by both internal and external parties FINANCIAL STATEMENTS ARE THE PRINCIPAL WAY OF COMMUNICATING FINANCIAL INFORMATION TO EXTERNAL PARTIES It includes: 1. Balance sheet 2. Income statement 3. Statement of Cash Flows 4. Statement of owners’ or shareholders’ equity 5. Note Disclosures Other forms of communicating financial information: 1. President’s letter 2. Supplementary schedules in the corporate annual report 3. Prospectuses 4. Reports filed with government agencies 5. News releases 6. Management forecasts 7. Description of an enterprise’s social or environmental impact User’s of Financial Reports – Anyone who prepares, relies on, reviews, audits, or monitors financial information 1. investors 2. creditors 3. analysts 4. managers 5. employees 6. customers 7. suppliers 8. industry groups 9. unions 10. government departments and ministers 11. public in general 12. regulatory agencies 13. other companies
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CACC414 CH01_02 14. standard setters 15. auditors 16. lawyers TO compare the income/assets of companies and thus assess the relative risks and returns of different investment opportunities. TO BE ABLE TO effectively channel resources – called capital allocation Capital Allocation Process In Canada, the primary exchange mechanisms for allocating resources are debt/equity markets & financial institutions SOURCES OF CAPITAL in Canada for various stages of company growth EFFECTIVE PROCESS OF CAPITAL ALLOCATION IS CRITICAL TO A HEALTHY ECONOMY as it promotes: 1. productivity 2. encourages innovation 3. provides an efficient and liquid market for selling/buying securities Unreliable and irrelevant information leads to poor capital allocation STAKEHOLDERS Stakeholders are parties who have something at risk in the financial reporting environment SEE P.7 Illustration 1-3: Relationship among selected key stakeholders MANAGEMENT BIAS There are many reasons why financial statements might be affected by management bias. These include the fact that: 1. the statements give information to users about management stewardship 2. managers are often compensated based on the company’s net income or share value
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CACC414 CH01_02 Therefore: - there is a strong desire to meet financial analysts’ expectations
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TEXT BOOK NOTES - CACC414 CH01_02 3 ESSENTIAL ACCOUNTING...

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