Question

1                                                                     (Total: 12 marks; 3 stakeholders x 4 marks each)

In chapter 1, we learned about the Canadian financial reporting environment, including the stakeholders for a private, public, or government organization. Identify 3 major stakeholders that use financial accounting information and briefly explain how these stakeholders might use the information from financial statements.

Question 1.2                                                                  (Total: 12 marks; 3 reasons x 4 marks each)

When preparing the financial statements, management may present biased information to stakeholders. There are several reasons why management would do this. Please identify at least 3 reasons management may present bias information, including 1-2 sentences explaining each reason.

Question 1.3                                                                                           (Total: 28 marks; 4 marks each)

After reading chapter 2, identify which specific qualitative characteristic of accounting information is best described in each item below (for example: relevance, representational faithfulness, comparability, etc.).

1.      Financial information should make a difference in a user’s decision making.

2.      Financial information should be available to users before it loses its ability to be useful for making a decision.

3.      Knowledgeable, independent users should be able to achieve similar results and consensus when accounting for a particular financial transaction.

4.      Complex Corporation provides overly complicated descriptions and explanations in its statement notes and provides only aggregated totals on the face of its financial statements. Which qualitative characteristic of accounting information is not followed?

5.      The CFO of WebMedia stresses that factual, truthful, unbiased information is the overriding consideration when preparing WebMedia's financial information.

6.      Base Line Inc. realizes that financial information may be misrepresented or misinterpreted if all pertinent information is not included.

7.      Wrong Turn Industries exercises due care and professional judgement in developing all estimates and assumptions used to prepare its financial information.

Question 1.4                                                                                                          (Total: 30 marks; 3 marks each)

Chapter 2 introduces you to the foundational principles of accounting, which are as follows:

Recognition/De-recognition	Measurement	Presentation and Disclosure
Economic Entity	Periodicity	Full Disclosure
Control	Monetary Unit
Revenue Recognition and Realization	Going Concern
Matching	Historical Cost
	Fair Value

For each situation that follows, identify the foundational principle that is most applicable:

1.      Price-level changes, meaning inflation and deflation, are not recognized in the accounting records.

2.      Sufficient financial information is presented so that reasonably prudent investors will not be misled.

3.      Goodwill is recorded only at the time of a business combination and does not change unless the goodwill becomes impaired.

4.      There is no intent to liquidate the company’s operations or activities.

5.      Market value is used by companies for the valuation of certain securities that are regularly bought and sold.

6.      After initial acquisition, the entity values land at its original transaction price.

7.      All significant post-balance sheet events are reported.

8.      Revenue is recorded at the point of sale.

9.      Sales commission costs are charged to expense in the period of the sale.

10.   Reporting must be done at defined time intervals.

Question 1.5                                                                                          (Total: 18 marks; 9 marks per scenario)

Red Squirrel Ltd. provides audited financial statements to its creditors and is required to maintain certain covenants based on its debt to equity ratio and return on assets. In addition, management at Red Squirrel Ltd. receive a bonus partially based on revenues for the year. Additional information related to Red Squirrel Ltd. is shown below:

1.      Depreciation expense on the building for the year was $45,000. Since the building was increasing in value during the year, the controller decided not to record any depreciation expense in the current year.

2.      An order for $61,500 was received from a customer on December 29, 2020 for products on hand. This order was shipped f.o.b. shipping point on January 3rd, 2021. The company made the following entry in December (prior to yearend of 2020):

Accounts Receivable    61,500

     Sales Revenue                      61,500

Please comment on the appropriateness of Red Squirrel’s accounting procedures and their impact on the company’s financial statement users for both scenarios, applying the conceptual framework.

Answer 1

Answer 1

There are twp types of stakeholders. One is Internal and another one is external. These stakeholders uses the accounting information for their decision making. Here, I am listing 3 stakeholders who uses the financial accounting information:

1. Management: Management is counted as internal user of stakeholder of the accounting information. Management uses accounting information extensively for various kinds of decisions such as financial and operational decisions. Examples: for price detemination, cost controlling decisions, new project investmets, profitability and so on.

2. Government: It is counted as External user or stakeholder of accounting information. Government levies various kind of taxes depending upon various factors such as depending upon location, type of goods and/or serives. Hence, Government uses accounting information to check that whether business entity is paying right amount of taxes or not.

3. Creditors: Creditors also counted as external user or stakeholder of accounting information. Since creditors supplies goods or services on credit, it is very essential for them to check the credit worthiness of the business organisation. Therefore, they also uses the accounting information.

Answer 1.2

1. Primacy Effect or First Impression: To create a good impression at the first impression of the financial statements, management took its decisions based on personal biasness. It was done attract more investors.

2. Tax Evasion: Sometimes for evading the tax, management shows less profits or even losses. This is also a wrong practice.

3.

Answer 1.3

1. When financial information should make a difference in a user's decision making, then it is come under the relevancy qualitative characteristics of accounting information as it meets the needs of the users in decision making.

2. It should be comes under the timliness qualitative characteristics of accounting information. Since, if the information is not reached to its users, there is no use of such information for decision making.

3. When the accounting information is verifiable then knowledgeable, independent users should be able to achieve similar results and consensus when accounting for a particular financial transaction.

4. Understandability qualitative characteristics of accounting information is missing here. If the accounting information is not simple, easy and understanable then it becomes difficult for its users to take appropriate decisions.

5. Representational faithfulness shows that accounting information should be complete, neutral i.e. free from biasness and free from errors.

6. When the information is complete then it helps in taking better decision making.

7. The accounting information should be free from error to depict a true and fair view of accounting information.

Answer 1.4

1. When price level changes were not taken into consideration, thwn it comes under Monetary Unit principle of accounting.

2. Full disclosure principle is followed in this case.

3. This comes under Historical Cost principle of accounting.

4. In such a case Going concern principle of accounting is followed.

5. Fair Value principle of accounting is followed when price is recorded at maket value for valuation of regularly bought and sold transactions.

6. Historical cost principle of accounting is followed when price is recorded at original transaction price.

7. Full disclosure principle of accounting is followed here.

8. Revenue recognistion and realization  principle of accounting is followed here.

9. Matching principle of accounting is followed in such a case.

10. Periodicity  principle of accounting is followed when reporting is done at definite time interval usually a year.

Answer 1.5

1. It is irrelevant that whether the value of an asset is increased or not. charging depreciation is mandatory. Hence, not to record the depreciation expense is inappropriate. It must be recorded to show the true and fair view.5