The glass lewis and co report concluded that when so

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more than triple the 2002 total, the year SOX passed. The Glass, Lewis and Co. report concluded that "when so many companies produce inaccurate financial statements, it seriously calls into question the quality of information that investors relied upon to make capital-allocation decisions" (CFO.Com). Bottom line: we must be critical readers of financial reports.
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Review of Financial Statements Module 1 I Framework for Analysis and Valuation 1-10 Companies use four financial statements to periodically report on business activities. These state- ments are the: balance sheet, income statement, statement of stockholders' equity, and statement of cash flows. Exhibit 1.2 shows how these statements are linked across time. A balance sheet reports on a company's financial position at a point in time. The income statement, statement of stock- holders' equity, and the statement of cash flows report on performance over a period of time. The three statements in the middle of Exhibit 1.2 (period-of-time statements) link the balance sheet from the beginning to the end of a period. L02 Identify and explain the four financial statements, and define the accounting equation. Financial Statement Links across Time Statement of Cash Flows alance Sheet Investing Nonowner Financing - - - - - - - - Income Statement Balance Sheet (end-of- period) = Aone-year, or annual, reporting period is common and is called the accounting, orfiscal, year. Of course, firms prepare financial statements more frequently; semiannual, quarterly, and monthly :5nancial statements are common. Calendar-year companies have reporting periods beginning on January 1and ending on December 31. Berkshire Hathaway is a calendar-year company. Some mpanies choose a fiscal year ending on a date other than December 31, such as when sales and inventory are low. For example, Best Buy's fiscal year-end is always near February 1, after the y holiday season. A balance sheet reports a company's financial position at a point in time. The balance sheet reports the company's resources (assets), namely, what the company owns. The balance sheet reports the sources of asset financing. There are two ways a company can finance its assets. I~can raise money from shareholders; this is ownerfinancing. It can also raise money from banks other creditors and suppliers; this is nonowner financing. This means that both owners and nowners hold claims on company assets. Owner claims on assets are referred to as equity and nowner claims are referred to as liabilities (or debt). Since all financing must be invested in something, we obtain the following basic relation: investing equals financing. This equality is called the accounting equation, which follows: = Liabilities + Owner Finaucing Assets + Equity The accounting equation works for all companies at all points in time. The balance sheet for Berkshire Hathaway is in Exhibit 1.3 (condensed). Refer to this bal- e sheet to verify the following amounts: assets = $372,229 million; liabilities = $209,295
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1-11 Module 1 I Framework for Analysis and Valuation million; and equity = $162,934 million. Assets equal liabilities plus equity, which reflects the accounting equation: investing equals financing.
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