Communicating and Interpreting Communicating and Interpreting Accounting Information Accounting Information Chapter 5 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.
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Communicating and Interpreting Communicating and Interpreting Accounting InformationAccounting Information
Chapter 5
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin Slide 2
Understanding the business
Corporate Governance:
Procedures to ensure that the company is
managed in the interest of the shareholdersSarbanes-Oxley
Act:A law which
strengthens financial reporting and
corporate governance for public companies.
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McGraw-Hill/Irwin Slide 3
Players in the AccountingCommunication Process
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McGraw-Hill/Irwin Slide 4
Regulators
Securities and Exchange Securities and Exchange CommissionCommission
Protects investors and maintain the Protects investors and maintain the integrity of the securities market.integrity of the securities market.
Financial Accounting
Standards BoardSets Generally
Accepted Accounting Standards (GAAP).
Public Company Accounting
Oversight BoardSets auditing standards for independent auditors
(CPAs) of public companies.
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McGraw-Hill/Irwin Slide 5
Managers
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Managers are responsible for the information in the financial statements and disclosures.
Chief Executive Officer (CEO): highest officer of the company
Chief Financial Officer (CFO): highest officer associated with the financial and accounting side of the business
Accounting staff prepare the details of the reports and also bear professional responsibility for the accuracy of the information.
Managers are responsible for the information in the financial statements and disclosures.
Chief Executive Officer (CEO): highest officer of the company
Chief Financial Officer (CFO): highest officer associated with the financial and accounting side of the business
Accounting staff prepare the details of the reports and also bear professional responsibility for the accuracy of the information.
McGraw-Hill/Irwin Slide 6
Independent AuditorsFollow established auditing standards to assess
the fairness of the financial statements and related presentations
Independent AuditorsFollow established auditing standards to assess
the fairness of the financial statements and related presentations
Auditors
An unqualified, or clean, opinion states
that the financial statements are fair presentations in all material respects in
conformity with GAAP.
An unqualified, or clean, opinion states
that the financial statements are fair presentations in all material respects in
conformity with GAAP.
Unqualified Opinion
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McGraw-Hill/Irwin Slide 7
Board of Directors (Audit Committee)
Board of DirectorsBoard of DirectorsThe board of directors is elected by The board of directors is elected by the stockholders to represent their the stockholders to represent their
interests. interests.
Board of DirectorsBoard of DirectorsThe board of directors is elected by The board of directors is elected by the stockholders to represent their the stockholders to represent their
interests. interests.
Board of Directors (Audit Board of Directors (Audit Committee)Committee)
The audit committee of the board of The audit committee of the board of directors is responsible for maintaining the directors is responsible for maintaining the
integrity of the company’s financial integrity of the company’s financial reports.reports.
Board of Directors (Audit Board of Directors (Audit Committee)Committee)
The audit committee of the board of The audit committee of the board of directors is responsible for maintaining the directors is responsible for maintaining the
integrity of the company’s financial integrity of the company’s financial reports.reports.
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McGraw-Hill/Irwin Slide 8
Annual Reports
For For privatelyprivately held companies, annual held companies, annual reports are simple documents that include:reports are simple documents that include:
1.1. Four basic financial statements.Four basic financial statements.2.2. Related notes (footnotes).Related notes (footnotes).3.3. Report of independent accountants Report of independent accountants
(auditor’s opinion) if the statements are (auditor’s opinion) if the statements are audited.audited.
McGraw-Hill/Irwin Slide 9
Annual Reports
For public companies, annual reports are elaborate due to SEC reporting requirements:
1. Nonfinancial Section Includes a letter to the stockholders, a description of
management’s philosophy, products, successes, etc.
2. Financial Section SEC sets minimum disclosure standards for the financial
section for public companies.
For public companies, annual reports are elaborate due to SEC reporting requirements:
1. Nonfinancial Section Includes a letter to the stockholders, a description of
management’s philosophy, products, successes, etc.
2. Financial Section SEC sets minimum disclosure standards for the financial
section for public companies.
McGraw-Hill/Irwin Slide 10
Annual Reports to Shareholders
1.1. Summarized financial Summarized financial data for 5- or 10-years.data for 5- or 10-years.
2.2. Management Discussion Management Discussion and Analysis (MD&A).and Analysis (MD&A).
3.3. The four basic financial The four basic financial statements.statements.
4.4. Notes (footnotes).Notes (footnotes).5.5. Independent Independent
Accountant’s Report Accountant’s Report and the Management and the Management Certification.Certification.
1.1. Summarized financial Summarized financial data for 5- or 10-years.data for 5- or 10-years.
2.2. Management Discussion Management Discussion and Analysis (MD&A).and Analysis (MD&A).
3.3. The four basic financial The four basic financial statements.statements.
4.4. Notes (footnotes).Notes (footnotes).5.5. Independent Independent
Accountant’s Report Accountant’s Report and the Management and the Management Certification.Certification.
6.6. Recent stock price Recent stock price information.information.
7.7. Summaries of the Summaries of the unaudited quarterly unaudited quarterly financial data.financial data.
8.8. Lists of directors and Lists of directors and officers of the officers of the company and relevant company and relevant addresses.addresses.
6.6. Recent stock price Recent stock price information.information.
7.7. Summaries of the Summaries of the unaudited quarterly unaudited quarterly financial data.financial data.
8.8. Lists of directors and Lists of directors and officers of the officers of the company and relevant company and relevant addresses.addresses.
McGraw-Hill/Irwin Slide 11
Quarterly Reports to Shareholders
Usually begin with short letter to stockholdersUsually begin with short letter to stockholders Condensed Condensed unauditedunaudited income statement and income statement and
balance sheet for the quarter.balance sheet for the quarter. Often, cash flow statement and statement of Often, cash flow statement and statement of
stockholders’ equity are stockholders’ equity are omittedomitted. Some notes to . Some notes to the financial statements also may be omitted.the financial statements also may be omitted.
Usually begin with short letter to stockholdersUsually begin with short letter to stockholders Condensed Condensed unauditedunaudited income statement and income statement and
balance sheet for the quarter.balance sheet for the quarter. Often, cash flow statement and statement of Often, cash flow statement and statement of
stockholders’ equity are stockholders’ equity are omittedomitted. Some notes to . Some notes to the financial statements also may be omitted.the financial statements also may be omitted.
McGraw-Hill/Irwin Slide 12
SEC Reports – 10-K, 10-Q, 8-K
Form 10-K Annual Report•Due within 90 days of the fiscal year-end.•Contains audited financial statements.
Form 10-K Annual Report•Due 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 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 4 days of the major event date.
Form 8-K Current Report•Due within 4 days of the major event date.
McGraw-Hill/Irwin Slide 13
Statement of Comprehensive income
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McGraw-Hill/Irwin Slide 14
Gross Profit Percentage
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McGraw-Hill/Irwin Slide 15
Return on Assets (ROA) Analysis
1(beginning total assets + ending total assets) ÷ 2
ROA measures how much the firm earned for each dollar of investment.
*(In complex calculations, interest expense (net of tax) and minority interest are added back to net income.
McGraw-Hill/Irwin Slide 16
ROA Profit Driver Analysis
= ×
Net IncomeAverage
Total Assets
Net IncomeAverage
Total AssetsNet IncomeNet Sales
Net IncomeNet Sales
Net SalesAverage
Total Assets
Net SalesAverage
Total Assets
×
=
McGraw-Hill/Irwin Slide 17
Differences in Accounting Methods acceptable under ifrs and u.s. gaapMany countries have adopted international financial reporting standards (IFRS) issued by the International Accounting Standards Board (IASB).
IFRS are similar to U.S. GAAP, but there are several important differences. The FASB and IASB are working together to eliminate
these and other differences.
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© 2008 The McGraw-Hill Companies, Inc.
End of Chapter 5
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