Chapter 6

Chapter 6 - Chapter 6 Communicating and Interpreting...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 6 Communicating and Interpreting Accounting Information Financial Accounting, Third Canadian Edition 6-1 Players in the Accounting Communication Process Management Preparation CFO, CEO, Accounting Staff Guided by GAAP Independent Auditors Verification Partners, Managers, Staff Guided by GAAS An unqualified opinion states An unqualified that the financial statements are fair presentations in all material respects in conformity with GAAP. GAAP. Financial Accounting, Third Canadian Edition 6-2 Players in the Accounting Communication Process Click to edit Master title style Management Preparation CFO, CEO, Accounting Staff Guided by GAAP Independent Auditors Verification Partners, Managers, Staff Guided by GAAS Information Information Intermediaries Intermediaries Analysis and Advice Financial analysis, Financial Information services Information Financial analysts Financial make predictions concerning companies’ future earnings and share prices. prices. 6-3 Financial Accounting, Third Canadian Edition Players in the Accounting Communication Process Click to edit Master title style Management Preparation CFO, CEO, Accounting Staff Guided by GAAP Independent Auditors Verification Partners, Managers, Staff Guided by GAAS Information Information Intermediaries Intermediaries Analysis and Advice Financial analysis, Financial Information services Information Government Government Regulators Regulators Verification Provincial securities staff Guided by securities Guided regulations regulations Users Analysis and Decision Investors, Lenders, etc. Financial Accounting, Third Canadian Edition Public companies only 6-4 Ensuring the Integrity of Financial Information Communication Process Regulators Standard Setting and Verification Auditing Standards (AASB), Auditing Accounting Standards (AcSB), Corporate Governance Standards (Stock Exchanges) (Stock Management Primary Responsibility CFO, CEO, Accounting Staff Auditors Verification Partners, Managers, Staff Directors Oversight Audit Committee Audit (Independent directors) (Independent 6-5 Financial Accounting, Third Canadian Edition The Disclosure Process Press Releases are used to announce quarterly and annual earnings as soon as the verified figures are available. the Earnings Press Release Excerpt for Forzani Group Ltd CNNMatthews, September 1, 2006 CALGARY, Alberta -- Sept. 1, 2006 – The Forzani Group Limited (TSX:FGL) today reported fiscal 2007 second quarter results for the 13 weeks ended July 30, 2006, announcing net earnings of $1.9 million compared with $2.3 million for the prior year’s second quarter. The net earnings were $0.07 before a $0.01 per share, non-recurring, non-cash charge to the Company’s future income tax expense . . . . Financial Accounting, Third Canadian Edition 6-6 Annual Reports For privately held companies, annual reports privately are simple documents that include: are 1. Four basic financial statements. 2. Related notes (footnotes). 3. Report of independent accountants Report (auditor’s opinion). (auditor’s Financial Accounting, Third Canadian Edition 6-7 Annual Reports For public companies, annual reports public companies annual are elaborate due to SEC reporting requirements: requirements: 1. A Nonfinancial Section • A lletter to the shareholders, a description of etter management’s philosophy, products, successes, etc. successes, 2. A Financial Section • See next slide for a detailed listing . . . See Financial Accounting, Third Canadian Edition 6-8 Annual Reports - Financial Section The Financial Section of a public company’s annual report includes: 1. Summarized financial Summarized data for 5- or 10-years. data 2. Management Discussion Management and Analysis (MD&A). and 3. The four basic financial The statements. statements. 4. Notes (footnotes). 5. Independent Independent Accountant’s Report and the Report of Management Responsibility. 1. Recent stock price 1. Recent information. information. 2. Summaries of the Summaries unaudited quarterly financial data. financial 3. Lists of directors and Lists officers of the company and relevant addresses. and Financial Accounting, Third Canadian Edition 6-9 Guiding Principles for Communicating Useful Information Primary Objective of External Financial Reporting To provide economic information to external users for decision making. Primary Qualitative Characteristics Primary Relevance: Timely and Predictive Feedback Value Timely Reliability: Accurate, Unbiased, and Verifiable Accurate, Secondary Qualitative Characteristics Comparability: Across businesses Consistency: Over time Consistency: Over Thefull-disclosureprinciplere quire . . . s 1. a com tese of financial state e and ple t m nts, com 2. note to thefinancial state e s m nts note Financial Accounting, Third Canadian Edition 6-10 Guiding Principles For Communicating Useful Information Information presented in financial reports is useful if it makes a difference in the context of making a decision. Relevance – Information disclosed in financial statements is relevant if it can influence user’s decision by helping them assess the impact of past activities and/or predict future events. Reliability – Information presented in financial statements is reliable when it is verifiable, unbiased, and accurate. Verifiability, neutrality, and representational faithfulness characterize the reliability of accounting information. Financial Accounting, Third Canadian Edition 6-11 Guiding Principles For Communicating Useful Information Comparability – enables users to identify similarities and discrepancies between two sets of financial reports produced by two different companies Consistency – enhances comparability by using the same accounting methods over time Financial Accounting, Third Canadian Edition 6-12 Financial Statement Formats Let’s take a closer look at the asset at asset section of the balance balance sheet! sheet! Financial Accounting, Third Canadian Edition 6-13 Financial Accounting, Third Canadian Edition 6-14 Current assets are assets that will be turned into cash or expire (be used up) within the longer of one year or the operating cycle. operating Financial Accounting, Third Canadian Edition 6-15 Property, plant and equipment includes assets with useful lives of more than one year acquired for use in the business rather than for resale. The amount is reported net of accumulated amortization. amortization Financial Accounting, Third Canadian Edition 6-16 Intangible assets have no physical existence and a long life. They include patents, copyrights, trademarks, etc. trademarks, Financial Accounting, Third Canadian Edition 6-17 Financial Statement Formats Let’s now look Let’s at the liability section of a section classified classified balance sheet. Financial Accounting, Third Canadian Edition 6-18 Financial Accounting, Third Canadian Edition 6-19 Current liabilities are obligations that will be paid with current assets, normally within one year. within 6-20 Financial Accounting, Third Canadian Edition Long-term liabilities are debts that have maturity dates extending beyond one year from the balance sheet date. year Financial Accounting, Third Canadian Edition 6-21 Financial Statement Formats Finally, we get Finally, to the shareholders’ equity section equity of a classified balance sheet. balance Financial Accounting, Third Canadian Edition 6-22 Share capital (or capital stock) reflects the monetary value of contributions made by shareholders. value Financial Accounting, Third Canadian Edition 6-23 Retained earnings is the total earnings of the company less the total dividends declared since inception of operations. inception Financial Accounting, Third Canadian Edition 6-24 Classified Income Statement Income statements have up to four major sections: 1. Continuing operations 2. Discontinued operations 3. Extraordinary items 4. Earnings per share Financial Accounting, Third Canadian Edition 6-25 Classified Income Statement General Format for the Classified Income Statement Gross sales minus any discounts, returns, and Net sales allowances during the period. Cost of goods sold Cost of inventory sold. Gross profit Operating expenses Income from operations Nonoperating revenues/expenses and gains/losses Income before income taxes Income tax expense Net income Not related to the company’s primary operations. Usually includes interest income or expense and any gains or losses from the retirement of equipment. Financial Accounting, Third Canadian Edition 6-26 − − ± − Discontinued Operations Sale or abandonment of a segment of a business. Income or loss on segment’s operation for the period. Gain or loss on disposal of the segment. Show net of tax effect. Financial Accounting, Third Canadian Edition 6-27 Extraordinary Items • unusual in nature • infrequent in occurrence • not dependent primarily on decisions by management or owners Show net of tax effect. Financial Accounting, Third Canadian Edition 6-28 Statement of Retained Earnings This statement reports the change in retained earnings that results from the net income (or loss) for the period less any distribution of dividends. Other changes that do not affect the operations of the current period are also reported in this statement. Financial Accounting, Third Canadian Edition 6-29 Cash Flow Statement Here is the operating activities section of the cash flow statement. Forzani Group uses the indirect method. This method eliminates all non-cash components of income. Financial Accounting, Third Canadian Edition 6-30 Here is the rest of Forzani Group’s cash flow statement. Financial Accounting, Third Canadian Edition 6-31 Notes to Financial Statements Descriptions of the key accounting policies Descriptions that apply to the company’s statements. that Additional detail supporting reported Additional amounts in the financial statements. amounts (eg. revenue analysis, description of unusual transactions, schedule of long-term assets, their accumulated amortization and net book values) accumulated Relevant financial information not Relevant disclosed on the statements. disclosed (eg. stock option plans, legal matters, subsequent events) Financial Accounting, Third Canadian Edition 6-32 ...
View Full Document

Ask a homework question - tutors are online