Chapter 5 - ACIS 2115 Chapter 5 Corporate Financial...

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ACIS 2115 Chapter 5 Corporate Financial Reporting and Analysis
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Learning Objective 1 Explain the needs of financial statement users.
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The Needs of Financial Statement Users Managers use accounting information to… run business fulfill management function Managers
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The Needs of Financial Statement Users Board of Directors uses accounting information to… make sure that managers make decisions that benefit stockholders to fulfill governance role Stockholders Directors Managers Elect Oversee Directors
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The Needs of Financial Statement Users Creditors use accounting information to… decide whether to enter into a contract with the company fulfill contracting role Loan covenants terms of a loan agreement if broken, entitle the lender to demand immediate repayment or renegotiation of the loan.
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The Needs of Financial Statement Users Investors use accounting information to… Evaluate financial strength and estimate value of company Assess stock price Fulfill valuation role
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Learning Objective 2 Describe the environment for financial reporting, including the Sarbanes-Oxley Act of 2002.
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The Fraud Triangle Accounting Fraud Opportunity (How?) Incentive (Why?) Character (Who?)
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Incentive to Commit Fraud Managers are under pressure to: meet loan covenants increase stock price and equity financing appear more profitable and attract partners Managers have incentives to satisfy personal greed by increasing job security Increasing personal wealth Increasing pay and bonuses
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Opportunity to Commit Fraud Opportunities increase when internal controls are weak Internal controls – methods used to protect against theft of assets, enhance the reliability of accounting information, promote efficient and effective operations, ensure compliance with laws and regulations
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Character to Rationalize and Conceal Fraud Many people that commit fraud “rationalize” that it is ok to do so They think they are “entitled” to extra wealth or that the victim deserves being stolen from.
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The Sarbanes-Oxley Act of 2002 Created in response to recent frauds and scandals Most significant change to financial reporting in the U.S. since SEC Acts of 1930’s All companies that trade on US stock exchanges must comply with SOX
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The Sarbanes-Oxley Act of 2002 Attempts to… Counteract incentives for committing fraud by: imposing stiff fines and prison terms.
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This note was uploaded on 08/15/2011 for the course ACIS 2115 taught by Professor Jayardley during the Spring '07 term at Virginia Tech.

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Chapter 5 - ACIS 2115 Chapter 5 Corporate Financial...

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