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Unformatted text preview: BCOR 2000 Chapter 5 Communicating and Interpreting Accounting Information Management Management Preparation Preparation CFO, CEO, Accounting Staff CFO, CEO, Accounting Staff Guided by GAAP Guided by GAAP Independent Auditors Independent Auditors Verification Verification Partners, Managers, Staff Partners, Managers, Staff Guided by GAAS Guided by GAAS Government Regulators Government Regulators Information Information Verification Verification Intermediaries Intermediaries SEC Members SEC Members Analysis and Advice Analysis and Advice Guided by SEC regs. Guided by SEC regs. Financial analysis, Financial analysis, Information services Information services Users Users Analysis and Decision Analysis and Decision Investors, Lenders, etc. Investors, Lenders, etc. Public companies only Role of Regulators U.S. Securities and Exchange Commission (SEC) Protect investors and maintain integrity of the securities markets Oversees the work of the FASB SEC delegates to FASB authority to set GAAP Oversees the PCAOB Sets auditing standards for auditors of public companies Reviews public filings for compliance and punishes violators CEO & CFO certify: Reports filed with SEC do not contain untrue material statements or omissions and fairly present the financial condition, results of operations, and cash flows of Co. No significant deficiencies or material weaknesses in internal controls over financial reporting Board of Directors: Elected by stockholders Responsible for ensuring processes in place for maintaining integrity of company's accounting, financial statement preparation, and financial reporting B o D Audit Committee independent directors, hire / retain auditors Managers' / B of D Reporting Roles Auditors SEC requires that public companies are audited by independent public accounting firms registered with PCAOB Opine on Financial Statements Unqualified (Clean) Opinion provides credibility Big Four
-Deloitte & Touche -Ernst & Young -PricewaterhouseCoopers-KPMG Financial Analysts Gather information from accounting reports, company executives, competitors, visits to company facilities, etc. Compile information into analysts' reports Forecasts of quarterly & annual earnings per share Price targets Buy, hold, or sell recommendation Analysts evaluated based on accuracy of their forecasts and profitability of their stock picks Analysts and Market Efficiency Reg FD Users Investors Institutional Investors include pension funds, mutual funds, trust funds `Buy-side' analysts Private Investors include large individual investors and small retail investors Often rely on advice of information intermediaries Users: Lenders / Creditors Include banks, suppliers, commercial credit companies and other financial institutions Use financial statements and other information Customers and Suppliers also use financial statements Guiding Principles for Communicating Useful Information Primary Objective of External Financial Reporting Primary Objective of External Financial Reporting To provide economic information to external users for To provide economic information to external users for decision making. decision making.
Primary Qualitative Characteristics Primary Qualitative Characteristics Relevance: Timely and Predictive Feedback Value Relevance: Timely and Predictive Feedback Value Reliability: Accurate, Unbiased, and Verifiable Reliability: Accurate, Unbiased, and Verifiable Secondary Qualitative Characteristics Secondary Qualitative Characteristics Comparability: Across businesses Comparability: Across businesses Consistency: Over time Consistency: Over time Communicating Useful Information Materiality - amounts large enough to influence a user's decision Conservatism do not overstate assets or revenues, do not understate liabilities or expenses; immediately recognize losses, delay recognition of gains Cost-Benefit Constraint - benefits of accounting for and reporting information should outweigh the costs Disclosure Process Provide all investors equal access to information Insider Trading Issue Press Releases after numbers are verified To provide timely information To limit the possibility of information leakage Many firms also issue management forecasts Annual Report (Form 10-K) Public Companies Financial Section
1. Summarized financial 1. Summarized financial data for 5- or 10-years. data for 5- or 10-years. 2. Management Discussion 2. Management Discussion and Analysis (MD&A). and Analysis (MD&A). 3. The four basic financial 3. The four basic financial statements. statements. 4. Footnotes to Financial 4. Footnotes to Financial Statements. Statements. 5. Independent 5. Independent Accountant's Report and Accountant's Report and the Management the Management Certification. Certification. 6. Recent stock price 6. Recent stock price information. information. 7. Summaries of the 7. Summaries of the unaudited quarterly unaudited quarterly financial data. financial data. 8. Lists of directors and 8. Lists of directors and officers of the company officers of the company and relevant addresses. and relevant addresses. SEC Reports 10-K, 10-Q, 8-K
Form 10-K Annual Report Form 10-K Annual Report Due within 90 days of the fiscal year-end. Due within 90 days of the fiscal year-end. Form 10-Q Quarterly Report Form 10-Q Quarterly Report Due within 45 days of the end of the quarter. Due within 45 days of the end of the quarter. Financial statements typically unaudited timely Financial statements typically unaudited timely review. review. Condensed statements, footnotes Condensed statements, footnotes Form 8-K Current Report Form 8-K Current Report Due within 15 days of the major event date. Due within 15 days of the major event date. Financial statements can be unaudited. Financial statements can be unaudited. Relate to auditor changes, mergers, acquisitions, Relate to auditor changes, mergers, acquisitions, management changes management changes Classified Income Statement Continuing Operations Non-operating Items Non-recurring Items Discontinued Operations Extraordinary Items both unusual and infrequent Earnings per Share = (NI Pfd Div) W-A Shrs O/S Classified Balance Sheet New Concepts Intangible Assets have no physical existence but a long life EX: Patents, copyrights, franchises, trademarks, goodwill Most intangible assets are amortized (Not goodwill or trademarks) Elements of Contributed Capital: (1) Par Value (Common Stock) (2) Additional Paid in Capital (aka Contributed Capital in Excess of Par) Notes to the Financial Statements Describe accounting rules used Additional details supporting the numbers in the financial statements Relevant financial information not disclosed in the financial statements Ratios from CH 5
Return on Equity = Net Income Average Stockholders' Equity The 2009 Return on Equity for IBM was:
$13,425 ($13,584 + $22,755) 2 = 73.89% The ratio indicates how well management has used Stockholders' Investment during the period. Ratios from CH 5
DuPont Analysis or ROE Decomposition: ROE = Net Profit * Asset * Margin Turnover Financial Leverage = (NI/Sales) * (Sales/Ave TA) * (Ave TA/Ave SE) For IBM (2009), ROE = 14.02% * 0.88 * 6.05 74% (rounding) ...
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- Spring '07