Rsm220-Week 01 Slides

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Chapter 1
The Canadian Financial Reporting Environment

Prepared by: Dragan Stojanovic, CA Rotman School of Management, University of Toronto

The Canadian Financial Reporting Environment
Role of Financial Reporting • Financial statements and financial reporting • Accounting and capital allocation •Stakeholders Objective of Financial Reporting •Management bias •Users’ needs Standard Setting • Need to develop standards • Parties involved in standard setting • Standard setting in a political environment GAAP • GAAP hierarchy •Professional judgement • Role of ethics Challenges Facing Financial Reporting • Globalization of companies and capital markets • Impact of technology • Changing nature of the economy • Increased requirement for accountability 2

The Canadian Financial Reporting Environment
Role of Financial Reporting • Financial statements and financial reporting • Accounting and capital allocation •Stakeholders Objective of Financial Reporting •Management bias •Users’ needs Standard Setting • Need to develop standards • Parties involved in standard setting • Standard setting in a political environment GAAP • GAAP hierarchy •Professional judgement • Role of ethics Challenges Facing Financial Reporting • Globalization of companies and capital markets • Impact of technology • Changing nature of the economy • Increased requirement for accountability 3

Characteristics of Accounting
1. Identification, measurement, and communication of financial information about; 2. Economic entities to; 3. Interested persons.

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Financial Reporting
• Financial accounting provides historical information • Financial reporting is used by both internal and external users • External users include such decision makers as investors, creditors, unions, and government agencies • Managerial accounting provides both historical and forecast information • Managerial reporting information is used by management (internal users only) 5

Financial Statements and Other Means of Financial Reporting • Major financial statements include: • Balance Sheet • Income Statement • Statement of Cash Flows • Statement of Shareholders’ (Owners’) Equity + Note Disclosures 6

Financial Reporting
• Other forms of financial reporting include: • President’s letter • Prospectuses • Government reporting • News releases • Management forecasts

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Accounting and Capital Allocation

Financial reporting aids users in the allocation of scarce resources (capital)

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Accounting and Capital Allocation
• The accounting profession has the responsibility of measuring a company’s performance accurately, fairly, and on a timely basis • These measurements enable investors and creditors to compare the income and assets employed by companies • Investors can then assess the relative risks and returns associated with companies 9

Capital Allocation Process

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Are financial statements comparable?
Company A Income Statement Sales Net Income Balance Sheet Assets Liabilities Equity $ 331,052 $ 170,308 $ 160,774 $116,371 $ 39,756 $ 76,615 $ 486,429 $ 41,060 $ 108,249 $ 25,922 Company B

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Facebook IPO and The Capital Allocation Process
• Morgan Stanley valued the company at $104 billion – • Facebook’s valuation was close to 100 times last year’s profits, significantly higher than tech giants Apple and Google that make far more money. Original plans to launch at $28 to $35 per share Increased number of shares issued by 25%

IPO Price: $38 per share – –

• •

Facebook amends IPO filing 6 times. Latest (1-1.5 weeks before the IPO) included warning about mobile revenues In the banks handling the IPO, analysts cut their forecasts for the firm after the IPO filing update. At the same time their investment banking colleagues and Facebook leaders were pushing for a sale at the very top end of their price range. Some 57% of the shares sold came from Facebook insiders. Typically the percentage of insider sales is under 10%. In other recent...
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