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FSA 2 - Financial Reporting and Analysis 1 Financial...

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Financial Reporting and Analysis Financial accounting is called financial because it aims at producing financial statements. It is then important to understand the factors that affect the nature and content of financial reports to appreciate the financial accounting information reported in them. The primary factors that affect the statements are either systemic errors, or personal bias, fraudulent or not, such as: 1. Accounting rules (GAAP), 2. Manager motivations, 3. Monitoring and enforcement mechanisms, 4. Regulators, 5. Industry practices, and other information sources. 06/13/11 1
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Form 10-K (Annual Report) 10-Q (Quarterly Report) 20-F (Registration Statement/ Annual Report [Foreign]) 8-K (Current Report) 14-A (Proxy Statement/Prospectus Other SEC Filings Statutory Financial Report s 06/13/11 2
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2-3 Earnings Announcement Key summary measures (pre-audit) Often one to six week lag Informative to market Lacks supporting financial details 06/13/11 3
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2-4 GAAP Types of Accounting rules and guidelines o Statements of Financial Accounting Standards o APB Opinions. (Accounting Principles Board) o Accounting Research Bulletins (ARB). o AICPA pronouncements. The AICPA issues guidelines for certain topics yet to be addressed by the FASB in its Statements of Position (SOP) or for those involving industry-specific matters in its Industry Audit and Accounting Guidelines. o EITF Bulletins. EITF Bulletins are issued by the FASB’s Emerging Issues Task Force. o Industry practices. 06/13/11 4
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2-5 Environmental Factors 06/13/11 5
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2-6 Securities and Exchange Commission o Independent, quasi-judicial government agency o Administer securities regulations & disclosures o Can modify & set GAAP, if necessary o Rarely directly challenges FASB o Major player in global accounting 06/13/11 6
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2-7 International Financial Reporting Standards (IFRS) 06/13/11 7 Set by International Accounting Standards Board Not currently accepted in U.S. SEC under pressure to accept IAS
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2-8 Environmental Factors Managers of Companies o Primary responsibility for fair & accurate reports o Applies accounting to reflect business activities o Managerial discretion is necessary in accounting o Major lobbyist on GAAP 06/13/11 8
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2-9 Monitoring and Enforcement Mechanisms 06/13/11 9 These mechanisms are important for the credibility and survival of the financial reporting because they “ try ” to ensure the reliability an integrity of financial reports. Could we say that in the present “debacle” in the US we can find the weakness of huge assets in the balance sheet the measurement of which rests on market value, i.e., promise?
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2-10 Environmental Factors Auditing o SEC requires Audit Report o Audit opinion can be: o clean (fairly presented) o qualified (except for) o disclaimer (no opinion) o Check Auditor quality & independence 06/13/11 10
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2-11
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