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

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

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

Stakeholder
s

Standard
Setting
Need to
develop
standards

GAAP

Challenges
Facing
Financial
GAAP
Reporting
Hierarchy

Parties involved Profession

in standard
al
setting
judgement
Standard
setting in a
political

Role of
Ethics

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
Financial
Reporting
Reporting
aids
aids

Users
Users
(present and
and
(present
potential) in
in
potential)

Users include:
Financial
investors,
Statements and
creditors,
other forms of
unions and
financial
govt. agencies
reporting

Capital
Capital
Allocation
Allocation
decisions
decisions
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 entitys economic resources, obligations
and equity/net assets;
2. changes in an entitys economic resources,
obligations and equity/net assets; and
3. the economic performance of the entity

Objectives of Financial
Reporting
Resource Allocation Decisions
Was income
Able to meet
Yes obligations and
earned to
generate
pay a return on
future cash?
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
Manageme
nt
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

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

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
Globalizatio
n

A move to global markets

and global investors

Technology

Ability to produce, and

access, timely information

New
economy
Accountabili
ty

A move from the

traditional resource
based to a knowledge
based economy
Driven by more
sophisticated and varied

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
publics perception of the professions
accountability
professions 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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