Intermediate Accounting Volume 1, 11th Canadian Edition Test Bank

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Intermediate Accounting Volume 1, 11th Canadian Edition Test Bank

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.

 

 

Multiple Choice QUESTIONS

 

Answer          No.      Description

d               1.        Accounting characteristics

a               2.        Nature of financial accounting

c                3.        Definition of financial accounting

b               4.        Definition of management accounting

d               5.        Efficient use of resources

c                6.        Capital allocation process

d               7.        Importance of accounting information

d               8.        Primary exchange mechanism(s) for allocating resources

c                9.        Changing financial reporting environment

b              10.       Stakeholders in the financial reporting environment

d              11.       Preparation of audited financial statements

a              12.       Auditor’s responsibility

c               13.       Causes of subprime lending crisis

a              14.       Management’s primary responsibility with respect to financial statements

c               15.       Primary responsibility of security and exchange commissions

b              16.       Objectives of financial reporting

b              17.       Appropriate objectives of general-purpose financial reporting

b              18.       Accrual-basis accounting

c               19.       Preparation of biased information

c               20.       Existence of information asymmetry

b              21.       Efficient markets hypothesis

d              22.       Management bias

a              23.       Moral hazard

d              24.       Conservative accounting

b              25.       Reduction of information asymmetry

b              26.       Development of GAAP

c               27.       Financial reporting before 1900

c               28.       Responsibility of the AcSB

a              29.       Oversight of AcSB

c               30.       Authority over accounting standards in the U.S

d              31.       Development of financial reporting standards in Canada

b              32.       Adoption of IFRS

d              33.       Activities and authority of the Ontario Securities Commission (OSC)

b              34.       Use of ASPE

a              35.       IASB’s standard setting process

c               36.       Primary sources of GAAP under ASPE

c               37.       Sources of GAAP

d              38.       Exercise of professional judgement

c               39.       Rules-based vs. principles-based approach

c               40.       Comparison of Canadian GAAP and U.S. GAAP

b              41.       SOX

a              42.       Advancement of technology on financial reporting

a              43.       IASB principles regarding funding

c               44.       Rules-based GAAP body of knowledge

 

 

Exercises

 

Item                 Description

E1-45              Effective capital allocation

E1-46              Financial statements in practice and theory

E1-47              Stakeholders in the financial reporting environment

E1-48              Sources of capital and stages of company growth

E1-49              Objectives of financial reporting

E1-50              Traditional users vs. others

E1-51              Imperfection of the stakeholder ecosystem

E1-52              Entity vs. proprietary perspective

E1-53              User needs

E1-54              The decision-usefulness approach to financial reporting

E1-55              Merits of accrual- vs. cash-basis accounting

E1-56              Information asymmetry

E1-57              Maintaining competitive advantage

E1-58              Management bias in financial statement presentation

E1-59              Role of securities commissions and stock exchanges

E1-60              Standard setting

E1-61              Purpose of accounting standards

E1-62              ASPE vs. IFRS

E1-63              Source of GAAP

E1-64              Sources of GAAP

E1-65              Professional judgement

E1-66              SOX and standard setting

E1-67              Challenges facing financial reporting

E1-68              Role of executives and management in a post-SOX world

E1-69              Technology and financial information


MULTIPLE CHOICE QUESTIONS

 

 

1.The essential characteristic(s) of accounting is (are)

  1. a) communication of financial information to interested internal parties only.
  2. b) communication of economic information to external parties.
  3. c) identification and measurement of financial information only.
  4. d) identification, measurement, and communication of financial information.

 

Answer: d

 

Difficulty: Easy

Learning Objective: Explain how accounting makes it possible to use scarce resources more efficiently.

Section Reference: Accounting and Capital Allocation

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

2.Financial accounting is concerned with the process that culminates in

  1. a) the preparation of financial reports.
  2. b) specialized reports for inventory management and control.
  3. c) specialized reports for income tax calculation and recognition.
  4. d) reports on changes in stock prices and future estimates of market position.

 

Answer: a

 

Difficulty: Easy

Learning Objective: Explain how accounting makes it possible to use scarce resources more efficiently.

Section Reference: Accounting and Capital Allocation

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

3.Financial accounting can be broadly defined as the area of accounting that prepares financial statements to be used

  1. a) by parties internal to the business enterprise only.
  2. b) by investors only.
  3. c) by parties both internal and external to the business enterprise.
  4. d) primarily by external users and Canada Revenue Agency.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how accounting makes it possible to use scarce resources more efficiently.

Section Reference: Accounting and Capital Allocation

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

4.Management accounting can be broadly defined as the area of accounting that communicates financial information

  1. a) to investors only.
  2. b) to parties internal to the business enterprise only.
  3. c) to parties both internal and external to the business enterprise.
  4. d) primarily to external users and Canada Revenue Agency.

 

Answer: b

 

Difficulty: Easy

Learning Objective: Explain how accounting makes it possible to use scarce resources more efficiently.

Section Reference: Accounting and Capital Allocation

CPA: Financial Reporting

CPA: Management Accounting

Bloomcode: Knowledge

 

 

5.Whether a business is successful and thrives is determined by

  1. a) free enterprise or competition.
  2. b) competition and markets only.
  3. c) markets and competition only.
  4. d) markets, competition and free enterprise.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Explain how accounting makes it possible to use scarce resources more efficiently.

Section Reference: Accounting and Capital Allocation

CPA: Financial Reporting

CPA: Strategy & Governance

Bloomcode: Knowledge

 

 

6.Which of the following is correct?

  1. a) Reported accounting numbers do not affect the transfer of resources.
  2. b) Credit rating agencies use accounting information to assess their assets.
  3. c) Efficient capital markets promote productivity and encourage innovation.
  4. d) Efficient capital markets promote productivity but do not encourage innovation.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how accounting makes it possible to use scarce resources more efficiently.

Section Reference: Accounting and Capital Allocation

CPA: Financial Reporting

CPA: Strategy & Governance

Bloomcode: Knowledge

 

 

  1. Information provided by accounting is important because it enables investors and creditors to
  2. a) compare income and assets of companies.
  3. b) assess the relative risks and returns of investment opportunities.
  4. c) channeltheir resources more effectively.
  5. d) all of the above

 

Answer: d

 

Difficulty: Easy

Learning Objective: Explain how accounting makes it possible to use scarce resources more efficiently.

Section Reference: Accounting and Capital Allocation

CPA: Financial Reporting

CPA: Strategy & Governance

Bloomcode: Knowledge

 

 

  1. In Canada, the primary exchange mechanism(s) for allocating resources is (are)
  2. a) debt& equity markets.
  3. b) financialInstitutions such as banks.
  4. c) government authorities such as the Canada Revenue Agency (CRA).
  5. d) both a & b

 

Answer: d

 

Difficulty: Medium

Learning Objective: Explain how accounting makes it possible to use scarce resources more efficiently.

Section Reference: Accounting and Capital Allocation

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Which of the following is/are major factors in the rapidly changing financial reporting environment in Canada?

a)increased demand for accountants and the impact of technology

b)globalization and the unethical actions of accountants

c)the growing number of institutional investors who want more information regarding environmental and social issues

d)increased use of the Internet

 

Answer: c

 

Difficulty: Easy

Learning Objective: Explain how accounting makes it possible to use scarce resources more efficiently.

Section Reference: Accounting and Capital Allocation

Learning Objective: Discuss some of the challenges and opportunities for accounting.

Section Reference: Challenges and Opportunities for the Accounting Profession

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

10.Stakeholders who help in the efficient allocation of resources include

  1. a) investors and creditors.
  2. b) financial analysts and regulators.
  3. c) creditors and auditors.
  4. d) management and auditors.

 

Answer: b

 

Difficulty: Easy

Learning Objective: Explain the meaning of “stakeholder” and identify key stakeholders in financial reporting, explaining what is at stake for each one.

Section Reference: Stakeholders

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

11.Audited financial statements are prepared by

  1. a) auditors.
  2. b) financial analysts.
  3. c) Canada Revenue Agency.
  4. d) management.

 

Answer: d

 

Difficulty: Easy

Learning Objective: Explain the meaning of “stakeholder” and identify key stakeholders in financial reporting, explaining what is at stake for each one.

Section Reference: Stakeholders

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

12.The auditor’s primary responsibility is to

  1. a) review financial statements and discuss them with management.
  2. b) prepare financial statements.
  3. c) report to Canada Revenue Agency.
  4. d) report to standard setters.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Explain the meaning of “stakeholder” and identify key stakeholders in financial reporting, explaining what is at stake for each one.

Section Reference: Stakeholders

CPA: Audit & Assurance

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

13.The widely publicized subprime lending crisis was NOT caused by

  1. a) capital market participants who acted in their own self-interest.
  2. b) a lack of transparency.
  3. c) the practice of securitizing assets.
  4. d) a lack of investor understanding of the investment’s true risk.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain the meaning of “stakeholder” and identify key stakeholders in financial reporting, explaining what is at stake for each one.

Section Reference: Stakeholders

CPA: Finance

CPA: Professional & Ethical Behaviour

CPA: Strategy & Governance

Bloomcode: Knowledge

 

 

  1. Management’s primary responsibility with respect to financial statements is to
  2. a) prepare them, as they have the best insight and know what should be included.
  3. b) audit them, as they are distant enough from daily operations.
  4. c) relyon them to make decisions.
  5. d) None of the above are true.

 

Answer: a

 

Difficulty: Easy

Learning Objective: Explain the meaning of “stakeholder” and identify key stakeholders in financial reporting, explaining what is at stake for each one.

Section Reference: Stakeholders

CPA: Financial Reporting

CPA: Strategy & Governance

Bloomcode: Knowledge

 

 

  1. The primary responsibility of security and exchange commissions with respect to financial statements is to
  2. a) set generally accepted accounting principles (GAAP), which must be followed in their preparation.
  3. b) review accounting choices made by companies in their financial statements to ensure decision-making logic is sound.
  4. c) monitor financial statements to ensure full and plain disclosure of material information thus maintaining compliance with listing requirements.
  5. d) monitor and analyze the information looking for signs of an improved or weakened financial condition.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain the meaning of “stakeholder” and identify key stakeholders in financial reporting, explaining what is at stake for each one.

Section Reference: Stakeholders

CPA: Financial Reporting

CPA: Strategy & Governance

Bloomcode: Knowledge

 

 

16.Objectives of financial reporting do NOT include

  1. a) providing information that is useful to users in making resource allocation decisions.
  2. b) providing information about the liquidation value of an enterprise.
  3. c) providing information about an entity’s economic resources, obligations, and equity/net assets.
  4. d) providing information about changes in an entity’s economic resources, obligations, and equity/net assets.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Identify the objective of financial reporting.

Section Reference: Objective of Financial Reporting

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. As part of the objective of general-purpose financial reporting, which of the following perspectives are considered appropriate?
  2. a) proprietary perspective
  3. b) entity perspective
  4. c) stakeholder perspective
  5. d) None of the above perspectives are considered appropriate.

 

Answer: b

 

Difficulty: Easy

Learning Objective: Identify the objective of financial reporting.

Section Reference: Objective of Financial Reporting

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Which of the following is NOT true regarding accrual-basis accounting?
  2. a) A company records events that change its financial statements in the periods in which the events occur.
  3. b) Revenues and expenses are recognized in the periods in which the company receives or pays cash.
  4. c) It has greater potential to depict meaningful trends in revenues and expenses.
  5. d) Revenues and expenses can be more easily related to the economic environment of the period in which they occurred.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Identify the objective of financial reporting.

Section Reference: Objective of Financial Reporting

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

19.The preparation by some companies of biased information is sometimes referred to as

  1. a) conservative financial reporting.
  2. b) full disclosure of all material facts.
  3. c) aggressive financial reporting.
  4. d) stewardship.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Explain how information asymmetry and bias interfere with the objective of financial reporting.

Section Reference: Information Asymmetry

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

20.Where information asymmetry exists, the capital market may attract the wrong kind of company. This is known as

  1. a) moral hazard.
  2. b) conservative accounting.
  3. c) adverse selection.
  4. d) an inefficient marketplace.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Explain how information asymmetry and bias interfere with the objective of financial reporting.

Section Reference: Information Asymmetry

CPA: Financial Reporting

CPA: Professional & Ethical Behaviour

Bloomcode: Knowledge

 

 

21.The “efficient markets hypothesis” proposes that

  1. a) market prices reflect information known only to internal stakeholders.
  2. b) market prices reflect all information about a company.
  3. c) market prices reflect information known only to external stakeholders.
  4. d) information asymmetry is required.

 

Answer: b

 

Difficulty: Easy

Learning Objective: Explain how information asymmetry and bias interfere with the objective of financial reporting.

Section Reference: Information Asymmetry

CPA: Finance

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

22.Which of the following does NOT describe a cause of management bias?

  1. a) the need to comply with contracts, such as debt covenants
  2. b) the desire to meet financial analysts’ expectations
  3. c) the tendency to downplay negative events
  4. d) the desire for all stakeholders to have access to all information

 

Answer: d

 

Difficulty: Medium

Learning Objective: Explain how information asymmetry and bias interfere with the objective of financial reporting.

Section Reference: Information Asymmetry

CPA: Audit &Assurance

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Where people think that no one is watching, they will often shirk their responsibilities.This is known as
  2. a) moral hazard.
  3. b) conservative accounting.
  4. c) adverse selection.
  5. d) an inefficient marketplace.

 

Answer: a

 

Difficulty: Easy

Learning Objective: Explain how information asymmetry and bias interfere with the objective of financial reporting.

Section Reference: Information Asymmetry

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Conservative accounting refers to
  2. a) a manager’s tendency to shirk his stewardship responsibilities.
  3. b) a manager’s engagement in greater risk taking.
  4. c) a decision to downplay the negative and focus on the positive.
  5. d) a decision to downplay the positive and focus on the negative.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Explain how information asymmetry and bias interfere with the objective of financial reporting.

Section Reference: Information Asymmetry

CPA: Financial Reporting

CPA:Strategy & Governance

Bloomcode: Knowledge

Feedback: a, b,& c describe aggressive accounting.

 

 

25.The problem of information asymmetry can be reduced by

  1. a) aggressive accounting.
  2. b) accounting standards.
  3. c) adverse selection.
  4. d) only focusing on positive events.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain the need for accounting standards and identify the major entities that influence standard setting and financial reporting.

Section Reference: Standard Setting

CPA: Financial Reporting

CPA:Strategy & Governance

Bloomcode: Knowledge

 

 

  1. Which of the following sources of generally accepted accounting principles (GAAP) are NOT developed by the Canadian Accounting Standards Board (AcSB)?
  2. a) Accounting Standards for Private Enterprises (ASPE)
  3. b) International Financial Reporting Standards (IFRS)
  4. c) GAAP for Pension Plans
  5. d) GAAP for Not-for-Profit entities

 

Answer: b

 

Difficulty: Easy

Learning Objective: Explain the need for accounting standards and identify the major entities that influence standard setting and financial reporting.

Section Reference: Standard Setting

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Before 1900, which of the following accurately describes financial reports?
  2. a) They emphasized the need for standardized and increased corporate disclosures.
  3. b) They were for widespread use and distribution.
  4. c) They emphasized solvency and liquidity.
  5. d) None of the above accurately describe financial reports pre-1900.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain the need for accounting standards and identify the major entities that influence standard setting and financial reporting.

Section Reference: Standard Setting

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

28.As of 2011, the responsibilities of the Accounting Standards Board (AcSB) in Canada relate to setting standards for

  1. a) publicly accountable entities only.
  2. b) both publicly accountable entities and private enterprises.
  3. c) private enterprises, not-for-profit entities and pension plans.
  4. d) not-for-profit entities and pension plans only.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Explain the need for accounting standards and identify the major entities that influence standard setting and financial reporting.

Section Reference: Standard Setting

CPA: Audit & Assurance

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

29.In Canada, the body that has the responsibility of overseeing the Accounting Standards Board (AcSB) is the

  1. a) Accounting Standards Oversight Council (AcSOC).
  2. b) International Accounting Standards Board (IASB).
  3. c) Canadian Institute of Chartered Accountants (CICA).
  4. d) Financial Accounting Standards Board (FASB).

 

Answer: a

 

Difficulty: Easy

Learning Objective: Explain the need for accounting standards and identify the major entities that influence standard setting and financial reporting.

Section Reference: Standard Setting

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

30.In the United States, the body that has the final authority over accounting standards is the

  1. a) Financial Accounting Standards Board (FASB).
  2. b) International Accounting Standards Board (IASB).
  3. c) Securities Exchange Commission (SEC).
  4. d) Accounting Standards Oversight Council (AcSOC).

 

Answer: c

 

Difficulty: Easy

Learning Objective: Explain the need for accounting standards and identify the major entities that influence standard setting and financial reporting.

Section Reference: Standard Setting

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

31.In Canada, the body which is NOT instrumental in the development of financial reporting standards is the

  1. a) Accounting Standards Board (AcSB).
  2. b) Financial Accounting Standards Board (FASB).
  3. c) International Accounting Standards Board (IASB).
  4. d) American Institute of Certified Public Accountants.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Explain the need for accounting standards and identify the major entities that influence standard setting and financial reporting.

Section Reference: Standard Setting

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

32.The adoption of International Financial Reporting Standards in Canada is an example of

  1. a) the impact of technology on user’s needs.
  2. b) the impact of globalization on capital markets.
  3. c) ethical behaviour.
  4. d) the desire of most private companies to expand internationally.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain the need for accounting standards and identify the major entities that influence standard setting and financial reporting.

Section Reference: Standard Setting

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

33.Which of the following statements does NOT describe the activities and authority of the Ontario Securities Commission (OSC)?

  1. a) The OSC reviews and monitors the financial statements of companies whose shares are listed on the Toronto Stock Exchange.
  2. b) The OSC issues its own disclosure requirements for listed companies.
  3. c) The OSC has the ability to fine or delist companies.
  4. d) The OSC issues financial accounting standards for Canadian companies.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Explain the need for accounting standards and identify the major entities that influence standard setting and financial reporting.

Section Reference: Standard Setting

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

34.Which of the following does NOTsupport the use of Accounting Standards for Private Enterprises (ASPE)?

  1. a) Private enterprises usually have less complex business models.
  2. b) Private enterprises that are “going public.”
  3. c) Private enterprises usually have fewer users.
  4. d) Private enterprises’ financial statement users tend to have first-hand information.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain the need for accounting standards and identify the major entities that influence standard setting and financial reporting.

Section Reference: Standard Setting

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

35.Which of the following does NOT describe a step in the IASB’s standard setting process?

  1. a) appointingtrustees to the IFRS Foundation
  2. b) development of an exposure draft
  3. c) provision of strategic advice by the IFRS Advisory Council
  4. d) public consultation

 

Answer: a

 

Difficulty: Easy

Learning Objective: Explain the need for accounting standards and identify the major entities that influence standard setting and financial reporting.

Section Reference: Standard Setting

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

36.Under ASPE, the primary sources of GAAP include

  1. a) accounting textbooks and journals.
  2. b) International Financial Reporting Standards.
  3. c) the CICA Handbook and appendices.
  4. d) research studies.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Explain the need for accounting standards and identify the major entities that influence standard setting and financial reporting.

Section Reference: Standard Setting

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. Under ASPE, the other (as opposed to primary) sources of GAAP include
  2. a) the CICA Handbook and appendices.
  3. b) Accounting Guidelines, including appendices.
  4. c) pronouncements by accounting standard-setting bodes in other jurisdictions.
  5. d) All of these are primary sources of GAAP.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Explain the meaning of generally accepted accounting principles (GAAP) and the significance of professional judgement in applying GAAP.

Section Reference: Generally Accepted Accounting Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

38.The exercise of professional judgement does NOT involve

a)the use of knowledge gained through education.

b)the application of knowledge gained through experience.

c)the use of ethical decision making.

d)aggressive accounting.

 

Answer: d

 

Difficulty: Easy

Learning Objective: Explain the meaning of generally accepted accounting principles (GAAP) and the significance of professional judgement in applying GAAP.

Section Reference: Generally Accepted Accounting Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. In a rules-based approach (such as U.S. GAAP), compared to a principles-based approach (such as Canadian GAAP),

a)the body of knowledge is smaller.

b)the importance of communicating the best information to users is emphasized.

c)since it is more prescriptive, it may be easier to defend how to account for a particular item.

d)companies frequently do not interpret the rules literally.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain the meaning of generally accepted accounting principles (GAAP) and the significance of professional judgement in applying GAAP.

Section Reference: Generally Accepted Accounting Principles

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. In a principles-based standard-setting system (such as Canadian GAAP), compared to a rules-based approach (such as U.S. GAAP),
  2. a) since it is more prescriptive, it may be easier to defend how to account for a particular item.
  3. b) there is a rule for every situation.
  4. c) accountants either apply specific standards based on the conceptual framework, or, professional judgement consistent with the framework.
  5. d) it is expected that professional accountants might encounter situations where they are unable to apply the principles appropriately.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain the meaning of generally accepted accounting principles (GAAP) and the significance of professional judgement in applying GAAP.

Section Reference: Generally Accepted Accounting Principles

Learning Objective: Discuss some of the challenges and opportunities for accounting.

Section Reference: Challenges and Opportunities for the Accounting Profession

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

41.The Sarbanes-Oxley Act (SOX) was NOT enacted to

a)help prevent fraud and poor financial reporting practices.

b)ensure the act was applied internationally.

c)enable the SEC to increase its policing efforts.

d)introduce new independence rules for auditors.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Discuss some of the challenges and opportunities for accounting.

Section Reference: Challenges and Opportunities for the Accounting Profession

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

42.Which of the following is likely to be an advantage of the advancement of technology on financial reporting?

a)Users of financial information will have access to more information.

b)The quality and reliability of the information may be compromised.

c)Equal and fair access may be at issue.

d)Internet reporting will increase costs.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Discuss some of the challenges and opportunities for accounting.

Section Reference: Challenges and Opportunities for the Accounting Profession

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

  1. One political factor influencing the standard setting process is how the standard-setting bodies are financed.Which of the following is NOT an IASB principle regarding the nature and amount of funding?
  2. a) Closed-loop: Financial commitments for funding should be contingent upon particular outcomes.
  3. b) Broad-based: It should not rely on one or a few sources.
  4. c) Compelling: Constituents should not be allowed to benefit from the standards without contributing to the process of standard setting.
  5. d) Country-specific: Funding should be shared by the major economies on a proportionate basis.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Discuss some of the challenges and opportunities for accounting.

Section Reference: Challenges and Opportunities for the Accounting Profession

CPA: Financial Reporting

Bloomcode: Knowledge

Feedback: Funding must be open-ended.

 

 

  1. Which of the following is an argument in favour of a GAAP body of knowledge that is more prescriptive, or rules-based?
  2. a) It always emphasizes communicating the best information for users.
  3. b) The body of knowledge becomes significantly smaller and therefore easier to manage.
  4. c) It may be easier to defend how to account for a particular item.
  5. d) There is a tendency for companies to interpret guidelines loosely, and thus account for items inconsistently.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Discuss some of the challenges and opportunities for accounting.

Section Reference: Challenges and Opportunities for the Accounting Profession

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

Exercises

 

 

Ex. 1-45Effective capital allocation

Explain the advantages of an effective capital allocation process.

 

Solution 1-45

An effective capital allocation process encourages innovation, promotes productivity, and provides a platform for buying and selling securities and obtaining and granting credit.

 

Difficulty: Easy

Learning Objective: Explain how accounting makes it possible to use scarce resources more efficiently.

Section Reference: Accounting and Capital Allocation

CPA: Communication

CPA: Management Accounting

Bloomcode: Knowledge

 

 

Ex 1-46Financial statements in practice and theory

What are the four most frequently provided financial statements?Provide two terminologies used to refer to each statement.

 

Solution 1-46

  1. Statement of financial position/Balance sheet
  2. Statement of income/comprehensive income/Income statement/ Profit &loss statement
  3. Statement of cash flows/ Cash flow statement
  4. Statement of changes in equity/ Statement of retained earnings

 

Difficulty: Easy

Learning Objective: Explain how accounting makes it possible to use scarce resources more efficiently.

Section Reference: Accounting and Capital Allocation

CPA: Communication

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

Ex. 1-47Stakeholders in the financial reporting environment

Briefly describe the much-publicized subprime lending crisis in the United States, and identify the stakeholders and how they were affected.

 

Solution 1-47

At the centre of this issue were securitized mortgage assets that were sold to investors. These assets were based on mortgages that had been extended to high-risk borrowers who could no longer afford their mortgage payments once interest rates rose. This led to a flooding of the housing market as borrowers walked away from their houses (and debt). The primary stakeholders were the lenders, borrowers and investors. Lenders (acting in their own self-interest) sold these investments to investors who may not have fully understood the high-risk nature of their investment. Borrowers lost their homes they could no longer afford, and investors suffered large losses due to the defaulted loans.

 

Difficulty: Medium

Learning Objective: Explain how accounting makes it possible to use scarce resources more efficiently.

Section Reference: Accounting and Capital Allocation

CPA: Communication

CPA: Finance

CPA: Strategy & Governance

Bloomcode: Knowledge

 

 

Ex. 1-48Sources of capital and stages of company growth

Briefly describe how the sources of capital a company relies upon for funding might vary according to their stage of growth.

 

Solution 1-48

As per Illustration 1-2,in the early project/idea stages a company will acquire its initial capital from founders, family, and friends.As they progress to the research & development or prototype stage, private and public venture capital may be introduced, and includes capital provided by angel investors, venture capitalists, and public exchanges such as the TSX Venture Exchange or TSX.Venture capitalists and these public exchanges become the dominant capital sources as greater amounts of capital are required and as a company progresses through commercialization and into stable production.

 

Difficulty: Easy

Learning Objective: Explain how accounting makes it possible to use scarce resources more efficiently.

Section Reference: Accounting and Capital Allocation

CPA: Communication

CPA: Finance

CPA: Strategy & Governance

Bloomcode: Knowledge

 

 

Ex. 1-49Objectives of financial reporting

What are the objectives of financial reporting by business enterprises?

 

Solution 1-49

The objectives of financial reporting are to provide information

  1. that is useful to investors, members, contributors, creditors and other users in making their resource allocation decisions and/or assessing management stewardship.
  2. to help users in evaluating an entity’s economic resources, obligations and equity/net assets and the changes to these items.
  3. to help users evaluate the economic performance of an entity.

 

Difficulty: Easy

Learning Objective: Explain how accounting makes it possible to use scarce resources more efficiently.

Section Reference: Accounting and Capital Allocation

CPA: Communication

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

Ex 1-50Traditional users vs. others

Beyond users relying directly on financial information for resource allocation, such as investors and creditor, identify at least two categories of stakeholders included in the broader definition of users who help in the efficient allocation of resources.For each category, indicate what is at stake.

 

Solution 1-50

Refer to Illustration 1-4.

Stakeholder What is at Stake
Securities commissions and stock exchanges Reputation, effective and efficient capital marketplace
Analysts and credit rating agencies Reputation, profits
Auditors Reputation, profits (companies and their clients)
Standard setters Reputation

 

Difficulty: Medium

Learning Objective: Explain the meaning of “stakeholder” and identify key stakeholders in financial reporting, explaining what is at stake for each one.

Section Reference: Stakeholders

CPA: Communication

CPA: Financial Reporting

CPA: Strategy & Governance

Bloomcode: Knowledge

 

 

Ex. 1-51Imperfection of the stakeholder ecosystem

The stakeholder ecosystem (depicted in Illustration 1-3) provides checks and balances to ensure that the people with capital—investors and creditors—have good information to use when deciding where best to invest and allocate capital.The system does not always work, however.Explain why this is the case.

 

Solution 1-51

The stakeholder ecosystem does not always provide perfect information for people with capital because it involves people, and human behaviour is an unpredictable variable.People often act in their own self-interest rather than in the best interest of the capital marketplace, and by extension, the economy.

 

Difficulty: Medium

Learning Objective: Explain the meaning of “stakeholder” and identify key stakeholders in financial reporting, explaining what is at stake for each one.

Section Reference: Stakeholders

CPA: Communication

CPA: Financial Reporting

CPA: Strategy & Governance

Bloomcode: Knowledge

 

 

Ex. 1-52Entity vs. proprietary perspective

Explain the difference between the entity perspective and the proprietary perspective.

 

Solution 1-52

The entity perspective views companies as separate and distinct from their owners. e.g., corporate assets are viewed as assets of the company and not of a specific creditor or shareholder. Investors and creditors have liability or equity claims. On the other hand, the proprietary perspective holds that financial reporting should focus only on the needs of theshareholders, and is not considered appropriate. The entity perspective is adopted as part of the objective of general-purpose financial reporting.

 

Difficulty: Easy

Learning Objective: Identify the objective of financial reporting.

Section Reference: Objective of Financial Reporting

CPA: Communication

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

Ex. 1-53User needs

Explain why providing information to users is a challenging task.

 

Solution 1-53

First, users have very different knowledge levels. Some users have accounting designations or have worked in the finance industry for several years. Others have limited knowledge of how the information is gathered and reported. Secondly, users have very different needs. Some users are institutional investors who hold a large percentage of equity shareholdings and generally devote significant resources to managing their investment portfolios. Others are credit managers at banks or credit unions who deal mainly with small business or personal loans. Still others are labour negotiators whose knowledge of financial reporting is limited to periodic reviews of financial information for the purpose of negotiations.

 

Difficulty: Easy

Learning Objective: Identify the objective of financial reporting.

Section Reference: Objective of Financial Reporting

CPA: Communication

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

Ex. 1-54The decision-usefulness approach to financial reporting

Explain what is meant by the “decision-usefulness” approach to financial reporting.Who will this information be useful to, and why?

 

Solution 1-54

The decision-usefulness approach to financial reporting dictates that financial statements provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers.It may also be useful to those who are not providers of capital such as analysts, regulators, and competitors.

 

Difficulty: Easy

Learning Objective: Identify the objective of financial reporting.

Section Reference: Objective of Financial Reporting

CPA: Communication

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

Ex. 1-55Merits of accrual- vs. cash-basis accounting

Investors are interested in assessing a company’s ability to generate net cash inflows, as well as its ability to protect and enhance capital investments.Briefly explain how each of the accrual- and cash-basis methods, respectively, might enhance these objectives.

 

Solution 1-55

Cash-basis accounting provides better information for assessing timing and amounts of cash flows, which assist with objective 1.Objective 2, concerning long-term performance of the company, may be better served by accrual-based accounting, which generally provides better information about future ability to generate favourable cash flows.It also ties operations to events and the surrounding environment, which are better indicators of performance, and the company’s ability to continue operating as a going concern.

 

Difficulty: Medium

Learning Objective: Identify the objective of financial reporting.

Section Reference: Objective of Financial Reporting

CPA: Communication

CPA: Financial Reporting

CPA: Management Accounting

Bloomcode: Knowledge

 

 

Ex. 1-56Information asymmetry

In markets where information asymmetry exists, there can be adverse selection and moral hazard. Explain what these terms mean.

 

Solution 1-56

Adverse selection refers to hidden knowledge, where the capital marketplace may attract the wrong type of company, such as companies who have the most to gain from not disclosing information. Given this situation, companies who do fully disclose all information may choose not to enter the marketplace if they are aware of the presence of adverse selection.

Moral hazardrefers to hidden actions, and occurs as a result of human nature. People or companies may shirk their responsibilities if they think they can get away with it, e.g., not disclose negative information since they know it may be detrimental to their share price. This is a form of management bias.

 

Difficulty: Medium

Learning Objective: Explain how information asymmetry and bias interfere with the objective of financial reporting.

Section Reference: Information Asymmetry

CPA: Communication

CPA: Financial Reporting

CPA: Strategy & Governance

Bloomcode: Knowledge

 

 

Ex. 1-57Maintaining competitive advantage

In the most efficient and effective marketplace possible, all stakeholders would have equal access to all relevant information.However, a company may feel that complete disclosure may hurt their competitive advantage or position.Offer an example of a circumstance where this may be the case.What do you think the company should do?

 

Solution 1-57

An example where disclosure may hurt the company’s competitive advantage or position would be a legal battle.If the company were in the middle of a lawsuit, the company would want to be careful about how much information was disclosed because it might affect the outcome of the lawsuit.This is an ethical dilemma.The company must weigh the costs and benefits of sharing information.If the financial impact of the lawsuit is expected to be material, they should, at minimum, disclose its existence in the notes to the financial statements.If amount and timing of any financial impact are sufficiently known and certain, an accrual of these amounts may be necessary.

 

Difficulty: Medium

Learning Objective: Explain how information asymmetry and bias interfere with the objective of financial reporting.

Section Reference: Information Asymmetry

CPA: Communication

CPA: Professional & Ethical Behaviour

CPA: Strategy & Governance

Bloomcode: Knowledge

Bloomcode: Evaluation

 

 

Ex. 1-58Management bias in financial statement presentation

There are many reasons why management may present biased information in the financialstatements.Identify at least three (3) such motivations.

 

Solution 1-58

Refer to Illustration 1-5.Possible motivations include:

  • evaluation of management performance
  • compensation structures
  • access to capital markets and meeting financial analyst expectations
  • contractual obligations

 

Difficulty: Easy

Learning Objective: Explain how information asymmetry and bias interfere with the objective of financial reporting.

Section Reference: Information Asymmetry

CPA: Communication

CPA: Professional & Ethical Behaviour

CPA: Strategy & Governance

Bloomcode: Knowledge

Bloomcode: Evaluation

 

 

Ex. 1-59Role of securities commissions and stock exchanges

Explain the role of securities commissions and stock exchanges in financial reporting.

 

Solution 1-59

The securities commissions and stock exchanges monitor the financial statements of companies whose shares are publicly traded to ensure that they provide full and plain disclosure of material information, and to ensure that the companies may continue to list shares on the stock exchanges. Securities commissions oversee and monitor the capital marketplace.

 

Difficulty: Easy

Learning Objective: Explain the need for accounting standards and identify the major entities that influence standard setting and financial reporting.

Section Reference: Standard Setting

CPA: Communication

CPA: Management Accounting

CPA: Strategy & Governance

Bloomcode: Knowledge

 

 

Ex. 1-60Standard setting

Explain the relationship between Canadian GAAP and International Financial Reporting Standards (IFRS).

 

Solution 1-60

Since the decision to adopt IFRS was made, Canadian GAAP has been continuously adjusted (converged) to mirror IFRS. Even prior to that convergence, both standards were principles based (rather than rulesbased).

 

Difficulty: Easy

Learning Objective: Explain the need for accounting standards and identify the major entities that influence standard setting and financial reporting.

Section Reference: Standard Setting

CPA: Communication

CPA: Management Accounting

CPA: Strategy & Governance

Bloomcode: Knowledge

 

 

Ex. 1-61Purpose of accounting standards

Accounting professions in various countries have tried to develop a set of standards that are generally accepted and universally practised.Explain the motivation for creating such a set of standards.

 

Solution 1-61

Creating standards facilitates comparability across companies and periods.Without standards, each enterprise would develop its own standards, and readers of financial statement would have to become familiar with every company’s particular accounting and reporting practices.It would be almost impossible to prepare statements that could be compared.

 

Difficulty: Easy

Learning Objective: Explain the need for accounting standards and identify the major entities that influence standard setting and financial reporting.

Section Reference: Standard Setting

CPA: Communication

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

Ex. 1-62ASPE vs. IFRS

Accounting standards for Private Enterprises (ASPE) are geared towards fewer users who have access to additional information about the company.The need for common language and comparability as facilitated by IFRS less necessary among private enterprises.Explain why, despite this, a private company might choose to voluntarily adopt IFRS.

 

Solution 1-62

A private company that is looking to go public might find it easier to follow IFRS right from the beginning.Other motivations might include specific requests from users, or ease of adoption if the small enterprise if a subsidiary of a larger company with IFRS reporting already in place.

 

Difficulty: Easy

Learning Objective: Explain the need for accounting standards and identify the major entities that influence standard setting and financial reporting.

Section Reference: Standard Setting

CPA: Communication

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

Ex. 1-63Sources of GAAP

International Financial Reporting Standards (IFRS) are the primary source of GAAP for public enterprises in Canada. They are, however, insufficient to address all of the accounting issues facing accountants. Explain why this is so and outline some other sources of GAAP that accountants use.

 

Solution 1-63

Although IFRS outline the specific accounting treatment for a multitude of items, for some items the guidelines are very general. Also, the business environment is complex and constantly changing and, therefore, some items may not be discussed at all. Thus, accountants must use IFRS in conjunction with other sources like professional judgement, pronouncements of other standard-setting bodies, accounting literature, and accepted industry practices.

 

Difficulty: Easy

Learning Objective: Explain the meaning of generally accepted accounting principles (GAAP) and the significance of professional judgement in applying GAAP.

Section Reference: Generally Accepted Accounting Principles

CPA: Communication

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

Ex. 1-64Sources of GAAP

The Canadian Principles-based GAAP does not offer specific standards for every transition.When specific guidance cannot be found in primary sources such as the Handbook and Accounting guidelines, what process should the accountant follow in their consultation of other sources?

 

Solution 1-64

If primary sources do not deal with the specific issue, the entity should use accounting policies that are consistent with primary sources.The policies should be developed through use of professional judgement in accordance with the conceptual framework.The accountant might consider pronouncements of other standard setters, accepted industry practices, and other literature, with the goal of producing information which is as relevant and reliable.

 

Difficulty: Medium

Learning Objective: Explain the meaning of generally accepted accounting principles (GAAP) and the significance of professional judgement in applying GAAP.

Section Reference: Generally Accepted Accounting Principles

CPA: Communication

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

Ex. 1-65Professional judgement

Explain the principle of professional judgement.When or why might it be necessary to employ professional judgement, even in a rules-based system?

 

Solution 1-65

Professional judgement is the process by which professional accountants with significant education and experience apply general principles appropriately as they see fit.This is important in Canada because IFRS and ASPE are based primarily on general principles rather than on specific rules.It may also be useful in a rules-based system, as novel circumstances and transactions are bound to arise for which a rule does not yet exist.In these scenarios, the professional accountant must make use of professional judgement to decide which treatment/record-keeping approach to a transaction will provide the most relevant, reliable, and timely information to financial statement stakeholders.

 

Difficulty: Medium

Learning Objective: Explain the meaning of generally accepted accounting principles (GAAP) and the significance of professional judgement in applying GAAP.

Section Reference: Generally Accepted Accounting Principles

CPA: Communication

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

Ex. 1-66SOX and standard setting

After several highly-publicized accounting scandals in the U.S. such as Enron, Sunbeam, and WorldCom, all of whom, coincidentally, were clients of the now basically defunct public accounting firm of Arthur Andersen, the U.S. regulators enacted the Sarbanes-Oxley Act (SOX). Pressure was put on Canada to follow a similar course. Explain what Canada has done to make public companies more accountable.

 

Solution 1-66

First, the Canadian Public Accountability Board (CPAB) was created to supervise accounting issues similar to those addressed by SOX. These included establishing auditing, quality control and independence standards and rules.

The Canadian Securities Administrators (CSA) has issued guidelines/rules that require (among other things)

  1. company management to take responsibility for the appropriateness and fairness of the financial statements
  2. public enterprises to have independent audit committees
  3. management to report on the effectiveness of their internal controls
  4. public accounting firms to be subject to CPAB
  5. greater disclosures, such as ratings from rating agencies, legal proceedings, payments to stock promoters, details about corporate directors.

 

Difficulty: Easy

Learning Objective: Discuss some of the challenges and opportunities for accounting.

Section Reference: Challenges and Opportunities for the Accounting Profession

CPA: Communication

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

Ex. 1-67Challenges facing financial reporting

In North America, the financial reporting environment is changing at a very rapid pace. Briefly describe four challenges facing the accounting profession today.

 

Solution 1-67
  1. Oversight in the capital marketplace. The Sarbanes-Oxley Act (SOX) instituted the Public Company Accounting Oversight Board (PCAOB), stronger independence rules for auditors, reporting on the effectiveness of the financial reporting internal control system, and disclosure of a code of ethics for senior financial officers.

Canada has followed suit and developed the Canadian Public Accountability Board (CPAB). As well, the Canadian Securities Administrators (CSA) requires company management to take responsibility for the appropriateness and fairness of the financial statements, public companies to have independent audit committees, and public accounting firms to be subject to the CPAB. The CSA also requires much greater disclosures. The overall impact of these financial reforms has been to put more emphasis on government regulation and less on self-regulation.

  1. Centrality of ethics. Accountants are central in making the capital marketplace efficient and effective. However, ethical dilemmas are common, often precipitated by management bias. It is not always easy to “do the right thing.” Pressure to bend the rules, play the game or “just ignore it” are often there. There is no consensus (yet) among accounting professionals as to what a comprehensive ethical system is, and so it is up to the individual accountant to maintain a high standard of ethics at all times.
  2. Standard setting in a political environment. Since standard setting is part of the real world, accounting standards often arise from political action. The stakeholders who lobby the hardest may unduly influence new or revised accounting standards. This is not surprising since many accounting standards have economic consequences. Thus standard setters such as the IASB must consider the needs of all stakeholders when creating or changing standards. The challenge is to find a balance between letting stakeholders have a say while not bowing to undue political pressure.
  3. Principles vs. rules. Rules-based, prescriptive systems (such as U.S. GAAP or the Canadian income tax system) have a significantly larger body of knowledge than a principles-based approach such as IFRS and ASPE. However, there is a tendency to interpret the rules literally with a rules-based approach, possibly because it may be easier to defend the accounting for a particular item. A disadvantage of the rules-based approach is that it may not always communicate the best information to the user. The principles-based approaches are based on professional judgement, resulting in carefully reasoned application of the principle to the business facts. Since the body of knowledge is smaller with principles-based approaches, the standard setters must ensure it rests on a cohesive set of principles and conceptual framework, which is sufficiently flexible, and sufficiently detailed to provide good guidance.

Other challenges are the impact of technology and integrated reporting.

 

Difficulty: Medium

Learning Objective: Discuss some of the challenges and opportunities for accounting.

Section Reference: Challenges and Opportunities for the Accounting Profession

CPA: Communication

CPA: Financial Accounting

CPA: Management Accounting

CPA: Professional & Ethical Behaviour

Bloomcode: Knowledge

 

 

Ex. 1-68Role of executives and management in a post-SOX world

SOX introduced sweeping changes to the institutional structure of the accounting profession.What key provision was introduced relating to the role of management and executive officers, and their relationship to financial reporting? Why?

 

Solution 1-68

Chief executive officers (CEOs) and chief financial officers (CFOs) are required to certify that the financial statements and company disclosures are appropriate and fairly presented.In many cases, they must forfeit bonuses and profits if there is a restatement of their companies’ accounting disclosures.Management must report on the effectiveness of financial reporting internal control systems.Requiring management and executives to make these attestations holds them accountable, and creates a greater sense of ownership over the financial statements.When this is done, management and executives are unable to claim ignorance if intentional misrepresentations or frauds present in the financial reports are uncovered, as many were in the pre-SOX era.

 

Difficulty: Easy

Learning Objective: Discuss some of the challenges and opportunities for accounting.

Section Reference: Challenges and Opportunities for the Accounting Profession

CPA: Audit & Assurance

CPA: Communication

CPA: Financial Reporting

CPA: Professional & Ethical Behaviour

CPA: Strategy & Governance

Bloomcode: Knowledge

 

 

Ex. 1-69Technology and financial information

Explain how technology impacts the accountants’ role as providers of information.

 

Solution 1-69

Technology impacts the process of identifying, measuring, and communicating useful information to users in profound ways.Information is increasingly abundant and available through technology.Companies are required to file disclosures electronically through securities commissions.Investors have access to a greater abundance of information as well.This includes earnings calls, analyst briefings, interviews with management and regulators and much, much more.The Internet allows disclosure of and access to a much larger group of users while reducing the cost of said communication.As technology advances as a rapid pace, information may even be available in real time.This raises the concern of equal access to information, as exposes companies to additional risks as they pertain to information security.

 

Difficulty: Medium

Learning Objective: Discuss some of the challenges and opportunities for accounting.

Section Reference: Challenges and Opportunities for the Accounting Profession

CPA: Audit & Assurance

CPA: Communication

CPA: Financial Reporting

CPA: Strategy & Governance

Bloomcode: Evaluation

Bloomcode: Knowledge

 

 

 

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