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 needs
in the financial reporting process.
 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 professional
judgement in applying GAAP.
 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 Objectives of Standard GAAP Challenges

Financial Financial Setting Facing
Reporting Reporting Financial
Financial Management Need to develop GAAP Reporting
statements bias standards Hierarchy
and financial
reporting

Accounting Users needs Parties involved Professional

and capital in standard judgement
allocation setting

Stakeholders Standard setting Role of

in a political Ethics
environment
 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 balance sheet
– the income statement
– the statement of cash flows
– the 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 Balance
Statement Sheet
Change in cash as
Reports Net Ending reported displays the
Income balance change in cash
reported position

Statement of Statement of
Equity 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 Users
Users Capital
Capital
Reporting
Reporting (present and
(present and Allocation
Allocation
aids
aids potential) in
potential) in decisions
decisions

Involves
Financial Users include:
determining
Statements and investors,
how funds are
other forms of creditors,
allocated among
financial unions and
competing
reporting govt. agencies
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 entity’s economic resources, obligations and
equity/net assets;
2. changes in an entity’s 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
earned to Yes obligations and pay a
generate return on investment
future cash? Capital
Assess Management Stewardship continues to
be available
Did mgmt. decisions on
Yes
resource acquisition and Investor & Creditor
allocation increase confidence
shareholder wealth? 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
Management Users
Use the reports to
acquire capital
Prepare the Use the reports for
reports investment/lending
decisions

Financial
Statements

Aggressive Financial Reporting has a direct

impact on the users decision-making process
 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 • Accounting Standards
Chartered Accountants Board (AcSB) of the CICA
(CICA) – Primary responsibility for
setting GAAP
• Provincial Securities • Ensure that companies
Commission listed on the exchange
prepare their statements in
accordance with GAAP
• Financial Accounting • U.S. standard setting body;
Standards Board (FASB) SEC ensures compliance by
and the Securities listed companies
Exchange Commission
• International Accounting • Work toward eliminating
Standards Committee international reporting
(IASC) standards
 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

• Globalization A move to global markets and

global investors
• Technology
Ability to produce, and
• New economy access, timely information
• Accountability A move from the traditional
‘resource’ based to a
‘knowledge based’ economy

Driven by more sophisticated

and varied investors
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
• public’s perception of the profession’s
accountability
• profession’s 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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