Accounting2011Notes

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Unformatted text preview: owners Use “someone else’s money” If cost of borrowing is less than return from business, excess goes to owners However, leverage creates an obligation to pay interest Employee Stock Options Gives recipient right to buy shares in the future at a set price Exercise price is the price specified Expiry date is when the options must be exercised by or they expire Jessica Gahtan ACTG2011 Page 19 Final Notes Chapters 8- 12 Fall 2013 Recorded as expense when granted at fair value When exercise price > market price – “in the money” When exercise price < market price – “out of the money” Economic Consequences Accounting has economic consequences – Management compensation – Compliance with covenants – Selling price of entity when price related to f/s – Income taxes – Rate changes if regulated – Eligibility for government subsidies – Ability to raise capital Financial Statement Analysis Book value does not equal fair value – Some assets are not recorded at all – Few are recorded at their fair value Price to Book Ratio (PB Ratio) = Market value of Equity Book value of Equity Financial Statement Analysis Earnings per share (EPS) Basic earnings per share = Net income – Preferred dividends Weighted- average number of common shares Fully diluted earnings per share Return on equity (ROE) = Net income – preferred dividends Average common shareholders’ equity Auditor’s Report (Appendix) Auditors examine an entity’s financial statements and accounting records to evaluate whether the statements are prepared in accordance with the relevant accounting standards (GAAP) Add credibility to the information Most common is “unqualified report” Qualified Opinion Used when, overall, the financial statements present an entity’s situation fairly but there are material deviations from GAAP or GAAS Contains the term “except for,” in the opinion paragraph and reason is explained Adverse Opinion Jessica Gahtan ACTG2011 Page 20 Final Notes Chapters 8- 12 Fall 2013 When the financial statements are misstated or misleading such that they do not fairly present an entity’s financial situation Disclaimer of Opinion When auditors can not obtain enough evidence to support an opinion, i.e., they are unable to express an opinion Wrap- up – – – – Various types of business organiza...
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