Chapter 02 - Financial Reporting and Analysis
2-1
Chapter 2
Financial Reporting and
Analysis
REVIEW
Financial statements are the most visible products of a company’s financial reporting
process.
The financial reporting process is governed by accounting rules and standards,
managerial incentives, and enforcement and monitoring mechanisms.
It is important for
a user of financial information to understand the financial reporting environment along
with the accounting information presented in financial statements.
In this chapter, the
concepts underlying financial reporting are discussed with special emphasis on
accounting rules.
Next the purpose of financial reporting is discussed – its objectives
and how these objectives determine both the quality of the accounting information and
the principles that underlie the accounting rules.
The relevance of accounting
information for business analysis and valuation is also discussed and limitations of
accounting information are identified.
Last, accrual accounting is discussed including
the strengths and limitation of accruals, and the implications of accruals for financial
statement analysis.
Chapter 02 - Financial Reporting and Analysis
2-2
OUTLINE
Financial Reporting Environment
Statutory Financial Reports
Financial Statements
Earnings Announcements
Other Statutory Reports
Factors Affecting Statutory Financial Reports
Generally Accepted Accounting Principles
GAAP Defined
Setting Accounting Standards
Role of the Securities and Exchange Commission
International Accounting Standards
Managers
Monitoring and Enforcement Mechanisms
Securities and Exchange Commission
Auditing
Corporate Governance
Litigation
Alternative Information Sources
Economic, Industry, and Company Information
Voluntary Disclosure
Information Intermediaries
Nature and Purpose of Financial Accounting
Objectives of Financial Accounting
Stewardship
Information for Decisions
Desirable Qualities of Accounting Information
Primary Qualities:
Relevance and Reliability
Secondary Qualities:
Comparability and Consistency
Important Principles of Accounting
Double-Entry
Historical Cost
Accrual Accounting
Full Disclosure
Materiality
Conservatism
Relevance and Limitations of Accounting
Relevance of Financial Accounting Information
Limitations of Financial Statement Information
Relevance and Limitations of Accrual Accounting
Relevance of Accrual Accounting
Conceptual Relevance of Accrual Accounting
Empirical Relevance of Accrual Accounting
Accruals Can Be a Double-Edged Sword
Analysis Implications of Accrual Accounting
Myths and Truths About Accruals and Cash Flows
Accruals and Cash Flows – Myths
