LN06-ch6-AFM101s11

LN06-ch6-AFM101s11 - Chapter 6 Communicating and...

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Unformatted text preview: Chapter 6 Communicating and Interpreting Accounting Information Financial Accounting, Third Canadian Edition 6-1 Players in the Accounting Communication Process 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 An unqualified opinion states An unqualified opinion states An unqualified An unqualified tthat the financial statements are hat the financial statements are ffair presentations in all material air presentations in all material rrespects in conformity with espects in conformity with GAAP. GAAP. GAAP. GAAP. Financial Accounting, Third Canadian Edition 6-2 Players in the Accounting Communication Process Click to edit Master title style 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 IInformation Information nformation Information Intermediaries IIntermediaries Intermediaries ntermediaries Analysis and Advice Analysis and Advice Financial analysis, Financial analysis, Financial Financial Information services IInformation services Information nformation Financial Accounting, Third Canadian Edition Financial analysts Financial analysts Financial Financial make predictions make predictions concerning concerning companies’ future companies’ future earnings and share earnings and share prices. prices. prices. prices. 6-3 Players in the Accounting Communication Process Click to edit Master title style 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 IInformation Information nformation Information Intermediaries IIntermediaries Intermediaries ntermediaries Analysis and Advice Analysis and Advice Financial analysis, Financial analysis, Financial Financial Information services IInformation services Information nformation Government Government Government Government Regulators Regulators Regulators Regulators Verification Verification Provincial securities staff Provincial securities staff Guided by securities Guided by securities Guided Guided regulations rregulations regulations egulations Users Users Analysis and Decision Analysis and Decision Investors, Lenders, etc. Investors, Lenders, etc. Financial Accounting, Third Canadian Edition Public companies only 6-4 Ensuring the Integrity of Financial Information Communication Process Regulators Regulators Standard Setting and Verification Standard Setting and Verification Auditing Standards (AASB), Auditing Standards (AASB), Auditing Auditing Accounting Standards (AcSB), Accounting Standards (AcSB), Corporate Governance Standards Corporate Governance Standards (Stock Exchanges) ((Stock Exchanges) (Stock Stock Management Management Primary Responsibility Primary Responsibility CFO, CEO, Accounting Staff CFO, CEO, Accounting Staff Auditors Auditors Verification Verification Partners, Managers, Staff Partners, Managers, Staff Financial Accounting, Third Canadian Edition Directors Directors Oversight Oversight Audit Committee Audit Committee Audit Audit (Independent directors) ((Independent directors) (Independent Independent 6-5 The Disclosure Process Press Releases are used to announce Press Releases are used to announce quarterly and annual earnings as soon as quarterly and annual earnings as soon as the verified figures are available. tthe verified figures are available. the he Earnings Press Release Excerpt for Forzani Group Ltd Earnings Press Release Excerpt for Forzani Group Ltd CNNMatthews, September 1, 2006 CNNMatthews, September 1, 2006 CALGARY, Alberta -- Sept. 1, 2006 – The Forzani Group CALGARY, Alberta -- Sept. 1, 2006 – The Forzani Group Limited (TSX:FGL) today reported fiscal 2007 second quarter Limited (TSX:FGL) today reported fiscal 2007 second quarter rresults for the 13 weeks ended July 30, 2006, announcing net esults for the 13 weeks ended July 30, 2006, announcing net earnings of $1.9 million compared with $2.3 million for the earnings of $1.9 million compared with $2.3 million for the prior year’s second quarter. The net earnings were $0.07 before prior year’s second quarter. The net earnings were $0.07 before a $0.01 per share, non-recurring, non-cash charge to the a $0.01 per share, non-recurring, non-cash charge to the Company’s future income tax expense .. .. .. .. Company’s future income tax expense Financial Accounting, Third Canadian Edition 6-6 Annual Reports For privately held companies, annual reports For privately held companies, annual reports privately privately are simple documents that include: are simple documents that include: are are 1. Four basic financial statements. 1. Four basic financial statements. 2. Related notes (footnotes). 2. Related notes (footnotes). 3. Report of independent accountants 3. Report of independent accountants Report Report (auditor’s opinion). (auditor’s opinion). (auditor’s (auditor’s Financial Accounting, Third Canadian Edition 6-7 Annual Reports For public companies,, annual reports For public companies annual reports public companies annual public companies annual are elaborate due to SEC reporting are elaborate due to SEC reporting requirements: requirements: requirements: requirements: 1. A Nonfinancial Section 1. A Nonfinancial Section • A lletter to the shareholders, a description of etter • A lletter to the shareholders, a description of etter management’s philosophy, products, management’s philosophy, products, successes, etc. successes, etc. successes, successes, 1. A Financial Section 1. A Financial Section • See next slide for a detailed listing .. .. .. • See next slide for a detailed listing See See Financial Accounting, Third Canadian Edition 6-8 Annual Reports - Financial Section The Financial Section of a public company’s annual report includes: 1. Summarized financial 1. Summarized financial 1. Summarized Summarized data for 5- or 10-years. data for 5- or 10-years. data data 2. Management Discussion 2. Management Discussion Management Management and Analysis (MD&A). and Analysis (MD&A). and and 3. The four basic financial 3. The four basic financial The The statements. statements. statements. statements. 4. Notes (footnotes). 4. Notes (footnotes). 5. IIndependent 5. Independent ndependent Independent Accountant’s Report and Accountant’s Report and tthe Report of he Report of Management Management Responsibility. Responsibility. Financial Accounting, Third Canadian Edition 6.. Recent stock price 6. Recent stock price 6 Recent Recent information. iinformation. information. nformation. 7. Summaries of the 7. Summaries of the Summaries Summaries unaudited quarterly unaudited quarterly financial data. ffinancial data. financial inancial 8. Lists of directors and 8. Lists of directors and Lists Lists officers of the company officers of the company and relevant addresses. and relevant addresses. and and 6-9 Guiding Principles for Communicating Useful Information Primary Objective of External Financial Reporting Primary Objective of External Financial Reporting Primary To provide economic information to external users To provide economic information to external users for decision making. for decision making. Primary Qualitative Characteristics Primary Qualitative Characteristics Primary Relevance: Timely and Predictive Feedback Value Relevance: Timely and Predictive Feedback Value Timely Timely Reliability: Accurate, Unbiased, and Verifiable Reliability: Accurate, Unbiased, and Verifiable Accurate, Accurate, Secondary Qualitative Characteristics Secondary Qualitative Characteristics Comparability: Across businesses Comparability: Across businesses Consistency: Over time Consistency: Over time Consistency: Over Consistency: Over The full­disclosure principle requires . . . The full­disclosure principle requires . . . 1. a complete set of financial statements, and 1. a complete set of financial statements, and 2. notes to the financial statements 2. notes to the financial statements Financial Accounting, Third Canadian Edition 6-10 Guiding Principles For Communicating Useful Information Information presented in financial reports is useful if it makes a difference in the context of making a decision. Relevance – Information disclosed in financial statements is relevant if it can influence user’s decision by helping them assess the impact of past activities and/or predict future events. Reliability – Information presented in financial statements is reliable when it is verifiable, unbiased, and accurate. Verifiability, neutrality, and representational faithfulness characterize the reliability of accounting information. Financial Accounting, Third Canadian Edition 6-11 Guiding Principles For Communicating Useful Information Comparability – enables users to identify similarities and discrepancies between two sets of financial reports produced by two different companies Consistency – enhances comparability by using the same accounting methods over time Financial Accounting, Third Canadian Edition 6-12 Financial Statement Formats Let’s take a closer look at the asset at asset section of the balance balance sheet! sheet! Financial Accounting, Third Canadian Edition 6-13 Financial Accounting, Third Canadian Edition 6-14 Current assets Current assets Current are assets that are assets that will be turned into will be turned into cash or expire cash or expire (be used up) (be used up) within the longer within the longer off one year or the o one year or the operating cycle. operating cycle. operating operating Financial Accounting, Third Canadian Edition 6-15 Property, plant and Property, plant and Property, equipment includes equipment includes assets with useful assets with useful llives of more than ives of more than one year acquired one year acquired ffor use in the or use in the business rather business rather tthan for resale. The han for resale. The amount is reported amount is reported net of accumulated net of accumulated amortization.. amortization amortization amortization Financial Accounting, Third Canadian Edition 6-16 IIntangible assets Intangible assets ntangible have no physical have no physical existence and a existence and a llong life. They ong life. They iinclude patents, nclude patents, copyrights, copyrights, trademarks, etc. ttrademarks, etc. trademarks, rademarks, Financial Accounting, Third Canadian Edition 6-17 Financial Statement Formats Let’s now look Let’s at the liability section of a section classified classified balance sheet. Financial Accounting, Third Canadian Edition 6-18 Financial Accounting, Third Canadian Edition 6-19 Current liabilities Current liabilities Current are obligations are obligations tthat will be paid hat will be paid with current with current assets, normally assets, normally within one year. within one year. within within Financial Accounting, Third Canadian Edition 6-20 Long-term liabilities are debts that have Long-term liabilities are debts that have Long-term maturity dates extending beyond one maturity dates extending beyond one year from the balance sheet date. year from the balance sheet date. year year Financial Accounting, Third Canadian Edition 6-21 Financial Statement Formats Finally, we get Finally, to the shareholders’ equity section equity of a classified balance sheet. balance Financial Accounting, Third Canadian Edition 6-22 Share capital (or capital stock) reflects the monetary Share capital (or capital stock) reflects the monetary Share value of contributions made by shareholders. value of contributions made by shareholders. value value Financial Accounting, Third Canadian Edition 6-23 Retained earnings is the total Retained earnings is the total Retained earnings of the company less the earnings of the company less the ttotal dividends declared since otal dividends declared since inception of operations. iinception of operations. inception nception Financial Accounting, Third Canadian Edition 6-24 Classified Income Statement Income statements have up to four major sections: 1. Continuing operations 2. Discontinued operations 3. Extraordinary items 4. Earnings per share Financial Accounting, Third Canadian Edition 6-25 Classified Income Statement − − ± − General Format for the Classified Income Statement Gross sales minus any Gross sales minus any discounts, returns, and discounts, returns, and Net sales allowances during the period. allowances during the period. Cost of goods sold Cost of inventory sold. Gross profit Cost of inventory sold. Operating expenses Income from operations Nonoperating revenues/expenses and gains/losses Income before income taxes Income tax expense Net income Not related to the company’s primary operations. Not related to the company’s primary operations. Usually includes interest income or expense and any Usually includes interest income or expense and any gains or losses from the retirement of equipment. gains or losses from the retirement of equipment. Financial Accounting, Third Canadian Edition 6-26 Discontinued Operations Sale or abandonment of a segment off Sale or abandonment of a segment o a business. a business. Income or loss on Income or loss on segment’s operation for segment’s operation for ttheperiod. he period. Gain or loss on Gain or loss on disposal of the disposal of the segment. segment. Show net of tax effect. Financial Accounting, Third Canadian Edition 6-27 Extraordinary Items • unusual in nature • infrequent in occurrence • not dependent primarily on decisions by management or owners Show net of tax effect. Financial Accounting, Third Canadian Edition 6-28 Statement of Retained Earnings This statement reports the change in retained earnings This statement reports the change in retained earnings tthatresults from the net income (or loss) for the period hat results from the net income (or loss) for the period llessany distribution of dividends. ess any distribution of dividends. Other changes that do not affect the operations of the Other changes that do not affect the operations of the current period are also reported in this statement. current period are also reported in this statement. Financial Accounting, Third Canadian Edition 6-29 Cash Flow Statement Here is the Here is the operating operating activities activities section of the section of the cash flow cash flow statement. statement. Forzani Group Forzani Group uses the iindirect uses the ndirect method..This method This method method eliminates all eliminates all non-cash non-cash components of components of iincome. ncome. Financial Accounting, Third Canadian Edition 6-30 Here is the Here is the rrestof est of Forzani Forzani Group’s Group’s cash flow cash flow statement. statement. Financial Accounting, Third Canadian Edition 6-31 Notes to Financial Statements Descriptions of the key accounting policies Descriptions of the key accounting policies that apply to the company’s statements. that apply to the company’s statements. Additional detail supporting reported Additional detail supporting reported amounts in the financial statements. amounts in the financial statements. (eg. revenue analysis, description of unusual (eg. revenue analysis, description of unusual ttransactions, schedule of long-term assets, their ransactions, schedule of long-term assets, their accumulated amortization and net book values) accumulated amortization and net book values) accumulated accumulated Relevant financial information not Relevant financial information not disclosed on the statements. disclosed on the statements. (eg. stock option plans, legal matters, subsequent events) (eg. stock option plans, legal matters, subsequent events) Financial Accounting, Third Canadian Edition 6-32 ...
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