Unformatted text preview: mation extends to numerous users that include:
Managers and employees Creditors and suppliers Shareholders and directors Customers Regulators Voters and their representatives Supply of Accounting Information
Supply of Accounting Information Determined by a company’s estimates of the benefits and costs of disclosure.
Regulation and bargaining power also play roles in determining the supply of financial accounting information.
The SEC requires financial statements, various note disclosures, and other reports on a regular basis. Supply of Accounting Information
Supply of Accounting Information Benefits of disclosure lower capital cost from improved transparency reputation effects enhance labor recruiting Costs of disclosure Information gathering costs More information to competitors Potential litigation costs Potential political costs Market Efficiency
Market Efficiency Profitability Analysis
Profitability Analysis Return on Assets (ROA):
ROA = Net Income / Average Assets For example, if we invest $100 in a savings account yielding $3 at yearend, the return on assets is 3%. Disaggregating Return on Assets
Disaggregating Return on Assets Profit Margin, Asset Turnover, and Return Profit Margin, Asset Turnover, and Return on Assets for Selected Industries Competitive Analysis
Competitive Analysis Bargaining Power of Buyers – Buyers with strong bargaining power can exact price concessions and demand a higher level of service and delayed payment terms
Bargaining Power of Suppliers – Suppliers with strong bargaining power can demand a higher price for their goods and early payments.
Threat of Substitution – When the number of product substitutes increases, sellers lose their ability to raise prices and/or pass on cost increases to buyers
Threat of Entry – New entrants to a market increase competition. To mitigate that threat, companies expend money to erect barriers to entry. These include R&D, advertising, management hires with special expertise, and mergers to create economies of scale. Five Forces of Competitive Intensity
Five Forces of Competitive Intensity Business Context for Financial Business Context for Financial Statements Accounting Principles and Accounting Principles and Governance Structures Information in financial statements enables company valuation and, by extension, the valuation of its debt and equity securities.
The importance of financial statements means that their accuracy is of paramount importance .
To the extent that financial performance and condition are accurately communicated to business decision makers, debt and equity securities will be more accurately priced. Oversight of Financial Accounting
Oversight of Financial Accounting Oversight of Financial Accounting Financial Accounting Standards Board (FASB) Generally Accepted Accounting Principles (GAAP) Board of Directors SEC oversees all publicly traded companies
EDGAR database (www.sec.gov) Audit Committee Courts Audit Report
Audit Report Financial statements present fairly and in all material respects company financial condition. Financial statements are prepared in conformity with GAAP
Financial statements are management’s responsibility. Auditor res...
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- Winter '11
- Financial Accounting, Berkshire Hathaway