ch 5 buad 280
TRANSCRIPT
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PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Communicating and InterpretingAccounting Information
Chapter 05
McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
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RegulatorsSecurities and Exchange Commission
Primary ResponsibilityProtect investors and maintain the integrity of the securities market.
Stock ExchangesPrimary Responsibility
Along with state governments, set overall corporate governance
standards.
Financial Accounting Standards BoardPrimary Responsibility
Set Generally Accepted Accounting Standards (GAAP).
Public Company Accounting Oversight BoardPrimary Responsibility
Sets auditing standards for independent auditors (CPAs)
of public companies.
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Managers
ManagementPrimary Responsibility
Responsible for the information in the financial statementsand disclosures.
Chief Executive Officer (CEO): highest officer of thecompany
Chief Financial Officer (CFO): highest officer associatedwith the financial and accounting side of the business
Accounting Staff: prepare the details of the reports andbear professional responsibility for the accuracy of theinformation.
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Board of Directors (Audit Committee)
Board of DirectorsPrimary Responsibility
Responsible for ensuring that processes are in place for
maintaining the integrity of the companys accounting, financial
statement preparation, and financial reporting.
Board of Directors (Audit Committee)Primary Responsibility
Is composed of non-management (independent) directors with
financial knowledge and is responsible for hiring the companys
independent auditors. They also meet separately with the
auditors to discuss managements compliance with their
financial reporting responsibilities.
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Independent AuditorsPrimary Responsibility
Follow established auditing standards to assess the fairness of
the financial statements and related presentations
Auditors
An unqualified, or clean,
opinion states that thefinancial statements are
fair presentations in all
material respects in
conformity with GAAP.
UnqualifiedOpinion
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Information Intermediaries: Financial
Analysts and Information Services
Information IntermediariesAnalysis and Advice
1. Receive accounting reports and other information about the
company from electronic information services
2. Gather information through conversations with company
executives and visits to company facilities and competitors
3. Results of their analyses are combined into analysts reports.
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Users: Institutional and Private
Investors, Creditors, and Other
Institutional InvestorsIncludes pension, mutual, endowment and other funds that invest on the
behalf of others
Private InvestorsIndividuals who purchase shares in companies
Lenders or CreditorsSuppliers, banks, commercial credit companies, and other financial
institutions that lend money to companies
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Guiding Principles for Communicating
Useful Information
Primary Objective of External Financial Reporting
To provide economic information to external users fordecision making.
Primary Qualitative Characteristics
Relevance: Timely and Predictive Feedback Value
Reliability:Accurate, Unbiased, and Verifiable
Secondary Qualitative Characteristics
Comparability:Across businesses
Consistency: Over time
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Differences in Accounting Methods
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Annual Reports
Forprivately held companies, annualreports are simple documents that include:
1. Four basic financial statements.
2. Related notes (footnotes).3. Report of independent accountants (auditors
opinion) if the statements are audited.
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Annual Reports
Forpubliccompanies, annual reports are elaboratedue to SEC reporting requirements:
1. Nonfinancial Section
Includes a letter to the stockholders, a description of
managements philosophy, products, successes, etc.
2. Financial Section
SEC sets minimum disclosure standards for the
financial section for public companies.
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Annual Reports
1. Summarized financialdata for 5- or 10-years.
2. Management Discussionand Analysis (MD&A).
3. The four basic financialstatements.
4. Notes (footnotes).
5. Independent Accountants
Report and theManagementCertification.
6. Recent stock price
information.7. Summaries of the
unaudited quarterlyfinancial data.
8. Lists of directors andofficers of the companyand relevant addresses.
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SEC Reports 10-K, 10-Q, 8-K
Form 10-K Annual ReportDue within 90 days of the fiscal year-end.Contains audited financial statements.
Form 10-Q Quarterly Report
Due within 45 days of the end of the quarter.Financial statements can be unaudited.
Form 8-K Current Report
Due within 15 days of the major event date.Financial statements can be unaudited.
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Classified Balance Sheet
Assets used of turned into
cash within one year.Assets used of turned into
cash beyond one year.
Obligations paid of
settled within one year.
Obligations paid of
settled after one year.
Contributed capital..
Reinvested earnings.
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Classified Income Statement
Net sales
Cost of goods sold
Gross profit
Operating expenses
Income from operations
Nonoperating revenues/expenses and gains/lossesIncome before income taxes
Income tax expense
Net income
Income Statements are prepared using thefollowing basic structure.
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Consolidated Income Statement
Operating
activities the
focus of the
business.
Net Income Average Number of Shares Outstanding
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Nonrecurring Items
Income statements may contain three sections:
1. Continuing operations
2. Nonrecurring Items
a) Discontinued operations
b) Extraordinary items
3. Earnings per share
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Earnings Per Share
EPS =Net Income*
Average Number of Shares of Common StockOutstanding During the Period
Basic EPS
*If there are preferred dividends, theamount is subtracted from the Net
Income in the numerator.
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Statement of Cash Flows
Recall that the Statement of Cash Flows is
divided into threemajor sections.
1. Cash flows from operating activities.
2. Cash flows from investing activities.
3. Cash flows from financing activities.
We will examine the indirect method of preparing the statement.This format begins with a reconciliation of accrual income to cash
flows from operations.
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Cash flows
associated with
earning income.
Cash flows related to
purchase and sale of
productive assets
and investments.
Cash flows related toborrowing and
repaying loans and
issue and repurchase
of stock.
Change in the cash
account.
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Accounting Rules Applied in the
Companys Statements
One of the first notes to the financial statements is usually
the statement of significant account policies.
This particular note relates to the Callaway Golfs policies
regarding depreciation of Property, Plant, and Equipment.
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Additional Detail Supporting
Reported Numbers
The second category of notes provides supplemental
information concerning the data shown on the financial
statements.
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Return on Assets (ROA) Analysis
1(beginning total assets + ending total assets) 2
Returnon
Assets=
Net Income*
Average Total Assets1
*(In complex calculations, interest expense (net of tax) and minority interestare added back to net income.
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ROA Profit Driver Analysis
ROANet ProfitMargin
AssetTurnover
=
Net IncomeAverage
Total AssetsNet IncomeNet Sales
Net SalesAverage
Total Assets
=
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Profit Drivers and Business Strategy
High-Value or Product-DifferentiationRely on R&D and product promotion to
convince customers of the superiority of
your product.Low-Cost Strategy
Rely on efficient management of accounts
receivable, inventory and productive assetsto produce high asset turnover.
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Discontinued Operations
Income or loss onsegments operation for
the period.
Gain or loss ondisposal of the
segment.
Sale or abandonment of a segment of a
business.
Show net of applicable taxes.
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Extraordinary Items
Unusual Infrequent
Show net of applicable taxes.
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Reporting Extraordinary Items and
Discontinued Operations
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End of Chapter 05