Test Bank For Intermediate Accounting 11th Canadian Edition Volume 2 by Donald E. Kieso

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Edition: 11th Edition

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Resource Type: Test bank

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Test Bank For Intermediate Accounting 11th Canadian Edition Volume 2 by Donald E. Kieso

ISBN-10: 1119274427, ISBN-13: 978-1119274421

CHAPTER 1: THE CANADIANFINANCIAL REPORTING ENVIRONMENT

CHAPTER STUDY OBJECTIVES

 

  1. 1. Explain how accounting makes it possible touse scarce resources more efficiently.Accounting provides reliable, relevant, and timelyinformation to managers, investors, and creditors sothat resources are allocated to the most efficiententerprises. Accounting also provides measurementsof efficiency (profitability) and financialsoundness.

 

2.Explain the meaning of “stakeholder” andidentify key stakeholders in financial reporting,explaining what is at stake for each one.Investors, creditors, management, securities commissions,stock exchanges, analysts, credit ratingagencies, auditors, and standard setters are some ofthe major stakeholders. Illustration 1-4 explains what is at stake for each one.

 

 

3.Identify the objective of financial reporting.The objective of financial reporting is to communicateinformation that is useful to key decisionmakerssuch as investors and creditors in makingresource allocation decisions (including assessingmanagement stewardship) about the resources andclaims to resources of an entity and how these arechanging.

 

4.Explain how information asymmetry and biasinterferes with the objective of financialreporting.Ideally, all stakeholders should have access to thesame information in order to ensure that good decisionsare made in the capital marketplace. (This isknown as information symmetry.) However, this isnot the case—there is often information asymmetry.Of necessity, management has access to more informationso that it can run the company. It must alsomake sure that it does not give away informationthat might harm the company, such as in a lawsuitwhere disclosure might cause the company to lose.Aside from this, information asymmetry existsbecause of management bias whereby managementacts in its own self-interest, such as wanting to maximizemanagement bonuses. This is known as moralhazard in accounting theory. Information asymmetrycauses markets to be less efficient. It may causestock prices to be discounted or costs of capital toincrease. In addition, it might detract good companiesfrom raising capital in the particular marketwhere relevant information is not available (referredto as adverse selection in accounting theory). Theefficient markets hypothesis is felt to exist only in asemi-strong form, meaning that only publicly availableinformation is assimilated into stock prices.

 

5.Explain the need for accounting standards& identify the major entities that influence standardsetting and financial reporting. The accounting profession has tried to develop a setof standards that is generally accepted and universallypractised. This is known as GAAP (generallyaccepted accounting principles). Without this set ofstandards, each enterprise would have to develop itsown standards, and readers of financial statementswould have to become familiar with every company’sparticular accounting and reporting practices.As a result, it would be almost impossible toprepare statements that could be compared. Inaddition, accounting standards help deal with theinformation asymmetry problem.

The Canadian Accounting Standards Board (AcSB)is the main standard-setting body in Canada for privatecompanies, pension plans, and not-for-profitentities. Its mandate comes from the CanadaBusiness Corporations Act and Regulations as wellas provincial acts of incorporation. For public companies,GAAP is International Financial ReportingStandards (IFRS) as established by the InternationalAccounting Standards Board (IASB). Public companiesare required to follow GAAP in order to accesscapital markets, which are monitored by provincialsecurities commissions. The Financial AccountingStandards Board (FASB) is also important as itinfluences IFRS standard setting. Private companiesmay choose to follow IFRS. Public companiesthat list on U.S. stock exchanges may choose to followU.S. GAAP.

 

6.Explain the meaning of generally acceptedaccounting principles (GAAP)& the significance of professional judgement in applying GAAP.Generally accepted accounting principles are eitherprinciples that have substantial authoritative support,such as the CPA Canada Handbook, or those arrived atthrough the use of professional judgement and theconceptual framework.

Professional judgement plays an important rolein Accounting Standards for Private Enterprises(ASPE) and IFRS since much of GAAP is based ongeneral principles, which need to be interpreted.

 

7.Discuss some of the challenges andopportunities for accounting.Some of the challenges facing accounting are oversightin the capital markets, centrality of ethics, standardsetting in a political environment, principlesversusrules-based standard setting, the impact oftechnology, and integrated reporting. All of theserequire the accounting profession to continue tostrive for excellence and to understand how accountingadds value in the capital marketplace.

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