Test Bank for Intermediate Accounting
, Twelfth Canadian
Edition
, Test Bank for Intermediate Accounting, Twelfth Canadian
Edition
CHAPTER 1
THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
CHAPTER STUDY OBJECTIVES
1. Understand the financial reporting environment. Accounting provides reliable, relevant, and
timely information to managers, investors, and creditors so that resources are allocated to the most
efficient enterprises. Accounting also provides measurements of efficiency (profitability) and
financial soundness. Investors, creditors, management, securities commissions, stock exchanges,
analysts, credit rating agencies, auditors, and standard setters are some of the major stakeholders.
Illustration 1-4 explains what is at stake for each one. The objective of financial reporting is to
communicate information that is useful to key decision makers such as investors and creditors in
making resource allocation decisions (including assessing management stewardship) about the
resources and claims to resources of an entity and how these are changing. Ideally, all stakeholders
should have access to the same information in order to ensure that good decisions are made in the
capital marketplace. (This is known as information symmetry.) However, this is not the case—there
is often information asymmetry. Of necessity, management has access to more information so that
it can run the company. It must also make sure that it does not give away information that might
harm the company, such as in a lawsuit where disclosure might cause the company to lose. Aside
from this, information asymmetry exists because of management bias whereby management acts in
its own self-interest, such as wanting to maximize management bonuses. This is known as moral
hazard in accounting theory. Information asymmetry causes markets to be less efficient. It may
cause stock prices to be discounted or costs of capital to increase. In addition, it might detract good
companies from raising capital in the particular market where relevant information is not available
(referred to as adverse selection in accounting theory). The efficient markets hypothesis is felt to
exist only in a semi-strong form, meaning that only publicly available information is assimilated
into stock prices.
2. Explain the need for accounting standards and identify the major entities that influence standard
setting and financial reporting. The accounting profession has tried to develop a set of standards
that is generally accepted and universally practised. This is known as GAAP (generally accepted
accounting principles). Without this set of standards, each enterprise would have to develop its
own standards, and readers of financial statements would have to become familiar with every
company’s particular accounting and reporting practices. As a result, it would be almost impossible
to prepare statements that could be compared. In addition, accounting standards help deal with the
information asymmetry problem.
The Canadian Accounting Standards Board (AcSB) is the main standard-setting body in Canada for
private companies, pension plans, and not-for-profit entities. Its mandate comes from the Canada
Business Corporations Act and Regulations as well as provincial acts of incorporation. For public
companies, GAAP is International Financial Reporting Standards (IFRS) as established by the
International Accounting Standards Board (IASB). Public companies are required to follow GAAP in
order to access capital markets, which are monitored by provincial securities commissions. The
Financial Accounting Standards Board (FASB) is also important as it influences IFRS standard
setting. Private companies may choose to follow IFRS. Public companies that list on U.S. stock
exchanges may choose to follow U.S. GAAP.
1-1
Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
,Test Bank for Intermediate Accounting, Twelfth Canadian Edition
3. Explain the meaning of generally accepted accounting principles (GAAP) and the significance of
professional judgement in applying GAAP. Generally accepted accounting principles are either
principles that have substantial authoritative support, such as the CPA Canada Handbook, or those
arrived at through the use of professional judgement and the conceptual framework.
Professional judgement plays an important role in Accounting Standards for Private Enterprises
(ASPE) and IFRS since much of GAAP is based on general principles, which need to be interpreted.
4. Discuss some of the challenges and opportunities for accounting. Some of the challenges facing
accounting are oversight in the capital markets, centrality of ethics, standard setting in a political
environment, principles- versus rules-based standard setting, the impact of technology, and
integrated reporting. All of these require the accounting profession to continue to strive for
excellence and to understand how accounting adds value in the capital marketplace.
1-2
Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
, Test Bank for Intermediate Accounting, Twelfth Canadian Edition
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
1-3
Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
, Twelfth Canadian
Edition
, Test Bank for Intermediate Accounting, Twelfth Canadian
Edition
CHAPTER 1
THE CANADIAN FINANCIAL REPORTING ENVIRONMENT
CHAPTER STUDY OBJECTIVES
1. Understand the financial reporting environment. Accounting provides reliable, relevant, and
timely information to managers, investors, and creditors so that resources are allocated to the most
efficient enterprises. Accounting also provides measurements of efficiency (profitability) and
financial soundness. Investors, creditors, management, securities commissions, stock exchanges,
analysts, credit rating agencies, auditors, and standard setters are some of the major stakeholders.
Illustration 1-4 explains what is at stake for each one. The objective of financial reporting is to
communicate information that is useful to key decision makers such as investors and creditors in
making resource allocation decisions (including assessing management stewardship) about the
resources and claims to resources of an entity and how these are changing. Ideally, all stakeholders
should have access to the same information in order to ensure that good decisions are made in the
capital marketplace. (This is known as information symmetry.) However, this is not the case—there
is often information asymmetry. Of necessity, management has access to more information so that
it can run the company. It must also make sure that it does not give away information that might
harm the company, such as in a lawsuit where disclosure might cause the company to lose. Aside
from this, information asymmetry exists because of management bias whereby management acts in
its own self-interest, such as wanting to maximize management bonuses. This is known as moral
hazard in accounting theory. Information asymmetry causes markets to be less efficient. It may
cause stock prices to be discounted or costs of capital to increase. In addition, it might detract good
companies from raising capital in the particular market where relevant information is not available
(referred to as adverse selection in accounting theory). The efficient markets hypothesis is felt to
exist only in a semi-strong form, meaning that only publicly available information is assimilated
into stock prices.
2. Explain the need for accounting standards and identify the major entities that influence standard
setting and financial reporting. The accounting profession has tried to develop a set of standards
that is generally accepted and universally practised. This is known as GAAP (generally accepted
accounting principles). Without this set of standards, each enterprise would have to develop its
own standards, and readers of financial statements would have to become familiar with every
company’s particular accounting and reporting practices. As a result, it would be almost impossible
to prepare statements that could be compared. In addition, accounting standards help deal with the
information asymmetry problem.
The Canadian Accounting Standards Board (AcSB) is the main standard-setting body in Canada for
private companies, pension plans, and not-for-profit entities. Its mandate comes from the Canada
Business Corporations Act and Regulations as well as provincial acts of incorporation. For public
companies, GAAP is International Financial Reporting Standards (IFRS) as established by the
International Accounting Standards Board (IASB). Public companies are required to follow GAAP in
order to access capital markets, which are monitored by provincial securities commissions. The
Financial Accounting Standards Board (FASB) is also important as it influences IFRS standard
setting. Private companies may choose to follow IFRS. Public companies that list on U.S. stock
exchanges may choose to follow U.S. GAAP.
1-1
Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
,Test Bank for Intermediate Accounting, Twelfth Canadian Edition
3. Explain the meaning of generally accepted accounting principles (GAAP) and the significance of
professional judgement in applying GAAP. Generally accepted accounting principles are either
principles that have substantial authoritative support, such as the CPA Canada Handbook, or those
arrived at through the use of professional judgement and the conceptual framework.
Professional judgement plays an important role in Accounting Standards for Private Enterprises
(ASPE) and IFRS since much of GAAP is based on general principles, which need to be interpreted.
4. Discuss some of the challenges and opportunities for accounting. Some of the challenges facing
accounting are oversight in the capital markets, centrality of ethics, standard setting in a political
environment, principles- versus rules-based standard setting, the impact of technology, and
integrated reporting. All of these require the accounting profession to continue to strive for
excellence and to understand how accounting adds value in the capital marketplace.
1-2
Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
, Test Bank for Intermediate Accounting, Twelfth Canadian Edition
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
1-3
Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
