Module01 - Module 1: Financial Accounting for MBAs The...

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Unformatted text preview: Module 1: Financial Accounting for MBAs The Accounting Reporting System Information System Financial Reporting System Periodic financial statements and related disclosures Managerial Reporting System Detailed plans and continuous performance reports External Decision Makers Investors, creditors, suppliers, customers, etc. Internal Decision Makers Managers throughout the organization Financial Accounting for MBAs Role of Financial Reporting Essential Role of Financial Reporting Closer look at Business Activities Accounting Principles and Governance Oversight of Financial Reporting Regulatory and Legal Environment SEC Enforcement Actions Financial Statement Balance Sheet Income Statement Statement of Stockholders' Equity Statement of Cash Flows Footnotes Profitability Analysis Measuring Return on Net Operating Assets Disaggregating Return on Net Operating Assets Independent Auditor's Report Role of Financial Accounting The essential role of financial accounting is: 1. to identify, measure, and communicate financial information 1. about economic entities 1. to facilitate decision making and resource allocation 1. by interested parties. interested parties What should be measured? When should we measure? How should we measure? When to communicate? What is the relevant entity? Who are the interested parties? Business Activities Financing Activities Financing activities refer to methods that companies use to raise the funds to pay for resources such as land, buildings, and equipment There are two main sources of financing: Equity financing Creditor (or debt) financing Financing Activities Types of Creditor Financing Investing creditors--those who primarily finance investing activities (such as bank lenders). Operating creditors--those who primarily finance operating activities (such as suppliers). Investing Activities Investing activities are the acquisition and disposition of resources (assets) that a company uses to produce and sell its products and services. The investing resources, or assets, are of two types Operating assets--resources devoted to operating activities Nonoperating (financial) assets--resources devoted to nonoperating activities Investing Activities The Accounting Equation Operating Activities Operating activities are the use of company resources to produce, promote, and sell its products and services. Operating Revenues (or sales) the inflow of assets from selling products and services. Operating Expenses (or costs) the outflow of assets to support operating revenues Operating Income = Operating Revenues Operating Expenses Financial Statements Berkshire Hathaway's Balance Sheet Initial Questions about the Balance Sheet What are the trade-offs in financing a company by owner versus nonowner financing? Should assets and liabilities be reported on the balance sheet at their acquisition price, called historical cost or at current market values? Which approach will be more informative? What problems might reporting balance sheets using current market value cause? An income statement reports on operating activities. It lists amounts for sales (and revenues) less all expenses (and costs) over a period of time. Sales less expenses yield the "bottomline" net income amount. Income Statement Berkshire Hathaway's Income Statement Initial Questions about the Income Statement Assume that a company sells a product to a customer who promises to pay in 30 days. Should the seller recognize the sale when it is made or when cash is collected? Should a company record the cost of a truck that it purchases as an expense when it is acquired? Employees commonly earn wages that are yet to be paid at the end of a particular period. Should their wages be recognized as an expense in the period that the work is performed, or when the wages are paid? Statement of Equity The statement of equity reports on changes in the accounts that makeup equity Contributed capital Earned capital (retained earnings and accumulated other comprehensive income) Berkshire Hathaway's Statement of Stockholders' Equity Statement of Cash Flows The statement of cash flows reports on cash flows for operating, investing, and financing activities over a period of time. Initial Questions about the Statement of Cash Flows What is the usefulness of providing the statement of cash flows? Is it important for a company to report net cash inflows (positive amounts) relating to operating activities over the longer term? How might the composition of operating, investing and financing cash flows change over a company's life cycle? Is the bottom line increase in cash flow the key number? Why or why not? Financial Statement Linkages The income statement and the balance sheet are linked via retained earnings. Retained earnings, contributed capital, and other equity balances appear both on the statement of stockholders' equity and the balance sheet. The statement of cash flows is linked to the income statement as net income is a component of operating cash flow. Annual Reports Financial Section 1. Summarized financial data for 5 or 10years. 2. Management Discussion and Analysis (MD&A). 3. The four basic financial statements. 4. Notes (footnotes). 5. Independent Auditor's Report and the Management Certification. 1. Recent stock price information. 2. Summaries of the unaudited quarterly financial data. 3. Lists of directors and officers of the company and relevant addresses. Oversight of Financial Accounting Audit Report Financial statements present fairly, in all material respects a company's financial condition, in conformity with GAAP. SarbanesOxley Act The SEC requires the CEO and CFO of a company to personally sign a statement attesting to the accuracy and completeness of the company's financial statements. The statements signed by both the CEO and CFO contain the following commitments: The CEO and CFO have personally reviewed the annual report There are no untrue statements of a material fact or failure to state a material fact necessary to make the statements not misleading The financial statements fairly present in all material respects the financial condition of the company All material facts are disclosed to the company's auditors and Board of Directors No changes to the company's system of internal controls are made unless properly communicated Financial Accounting: not an exact science GAAP allows companies choices in preparing financial statements (inventories, property, and equipment). Companies must choose among the alternatives that are acceptable under GAAP. Financial statements also depend on countless estimates. Profitability Analysis ...
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