Ch05+-+Communication - Chapter 5 Communicating and...

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Unformatted text preview: Chapter 5 Communicating and Interpreting Accounting Information Players in the accounting communication process Financial information available to users Format of financial statements 5-1 Players in the Accounting Communication Process SEC Standard Setting and Regulation Management Primary Responsibility CFO, CEO, Accounting Staff Auditors (CPAs) Verification Partners, Managers, Staff Directors Oversight Audit Committee (Independent directors) Issue audit opinion Public Company Accounting Oversight Board Set audit standards (GAAS) FASB Set accounting standards (GAAP) 5-2 International Financial Reporting Standards IFRS are accounting guidelines formulated by the International Accounting Standards Board with the objective of having one set of global standards. IFRS: principles based US GAAP: rules based If the SEC determines in 2011 to incorporate IFRS into the US domestic reporting system, the first time US issuers would report under that system would be approximately 2015 or 2016. 5-3 IFRS Sample Differences 5-4 Information Intermediaries Analysis and Advice Financial analysis, Information services Annual report and other public financial information Management Preparation CFO, CEO, Accounting Staff Users Analysis and Decision Investors, Lenders, etc. External Users of Financial Information 5-5 Analysts Southwest (LUV) Financial analysts make predictions concerning companies future earnings: Qtr Qtr FY FY Sep-10 Dec-10 Dec-10 Dec-11 Average Estimate $ 0.24 $ 0.16 $ 0.72 $ 0.98 Number of Analysts 13 12 15 13 High Estimate $ 0.29 $ 0.26 $ 0.87 $ 1.30 Low Estimate $ 0.20 $ 0.09 $ 0.57 $ 0.80 Year Ago EPS $ 0.03 $ 0.10 $ 0.19 $ 0.72 Earnings Estimates msn.com 9/13/10 NB: EPS excludes non-recurring items. 5-6 Analysts Southwest (LUV) Financial analysts then make recommendations to buy or sell a stock: msn.com 9/13/10 5-7 5-8 Guidelines for Useful Information 1. Qualitative Characteristics 1. Exceptions 5-8 5-9 Qualitative Characteristics Useful financial information has: 1. Relevance Has capacity to make a difference. 1. Reliability verifiable and can be confirmed by an independent observer. Examples: How is the value of a truck purchased by Wal-Mart measured? How does Kaiser Permanente determine a liability for malpractice? 1. Comparability can be compared between companies (i.e. same accounting rules used). 1. Consistency same accounting rules used from one period to the next. 5-9 5-10 Exceptions Cost-benefit: Benefits to users should outweigh costs of providing information. Materiality: For small amounts, GAAP does not need to be followed (i.e. will not impact a users decision)....
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Ch05+-+Communication - Chapter 5 Communicating and...

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