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Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

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Presentation on theme: "Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved."— Presentation transcript:

1 Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

2 Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 10 Corporate Governance, Notes to the Financial Statements, and Other Disclosures PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA

3 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-3 Learning Objectives After studying this chapter you should understand and be able to: 1.Discuss the significance of corporate governance. 2.Identify the types of financial reporting misstatements that have occurred in recent years. 3.Explain why the notes are an integral part of the financial statements. 4.Discuss the kinds of significant accounting policies that are explained in the notes. 5.Describe the nature and content of various note disclosures. 6.Explain the role of the Securities and Exchange Commission and some of its reporting requirements. 7.Explain why a statement of managements responsibility is included with the notes. 8.Describe the significance of managements discussion and analysis of the firms financial condition and results of operations. 9.Identify what is included in the five-year (or longer) summary of financial information. 10.Discuss the meaning and content of the independent auditors report. 10-3

4 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-4 Corporate Governance Business ethics Business ethics Social responsibility Social responsibility Equitable treatment of shareholders Equitable treatment of shareholders Disclosures and transparency Disclosures and transparency Board of directors responsibility Board of directors responsibility L O

5 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-5 Corporate Governance L O 1 The most powerful legislation to date has been the Sarbanes–Oxley Act (SOX) of 2002, which created the Public Company Accounting Oversight Board (PCAOB) as the authoritative watchdog over the accounting and auditing profession. The SOX legislation was aimed primarily to curtail the misbehavior of senior management of corporate entities: Chief executive officers (CEOs) and chief financial officers (CFOs) are required under SOX to attest (in front of a notary) to the correctness of their companys financial statements. The SOX legislation was aimed primarily to curtail the misbehavior of senior management of corporate entities: Chief executive officers (CEOs) and chief financial officers (CFOs) are required under SOX to attest (in front of a notary) to the correctness of their companys financial statements. The registrant must also report in a separate section of its annual 10-K report any Changes in and Disagreements with Accountants on Accounting and Financial Disclosure as an added measure of transparency and management accountability. The registrant must also report in a separate section of its annual 10-K report any Changes in and Disagreements with Accountants on Accounting and Financial Disclosure as an added measure of transparency and management accountability. 10-5

6 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-6 Corporate Governance L O 1 In response to the financial crisis of 2007–2008, Congress passed the Wall Street Reform and Consumer Protection Act of 2010 (referred to as the Dodd-Frank Act ). Although most of the act deals with financial regulation, several Dodd-Frank provisions impose new corporate governance rules not just on Wall Street banks but also on Main Street public corporations. Dodd-Frank Act contains the say on pay mandate requiring periodic shareholder advisory votes on executive compensation and golden parachute provisions. Dodd-Frank Act contains the say on pay mandate requiring periodic shareholder advisory votes on executive compensation and golden parachute provisions. Dodd-Frank provision requires companies to disclose the reasons that they have chosen to have either the same person or separate people serve as the CEO and chairman of the board. 10-6

7 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-7 Recent Financial Misstatements L O

8 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-8 Recent Financial Misstatements L O

9 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-9 Because of the complexities related to financial reporting and because of the number of alternative generally accepted accounting principles that can be used, explanatory notes are included as an integral part of the financial statements. L O 3 Notes to the Financial Statements 10-9

10 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Summary of Significant Accounting Policies Typical accounting policies that are disclosed in the notes to the financial statements include: 1.Depreciation method used. 2.Inventory valuation method used. 3.Basis of consolidation of subsidiaries. 4.Reconciliation of taxes paid to tax expense. 5.The cost of employee benefit plans. 6.Treatment of goodwill and intangible assets. 7.Earnings per share information. 8.Stock option and stock purchase plans. L O 4 Notes to the Financial Statements 10-10

11 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Other Disclosures 1.Accounting changes. 2.Business combinations. 3.Contingencies and commitments. 4.Events subsequent to the balance sheet date. 5.Impact of inflation. 6.Segment information. 1.Accounting changes. 2.Business combinations. 3.Contingencies and commitments. 4.Events subsequent to the balance sheet date. 5.Impact of inflation. 6.Segment information. L O

12 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Depreciation Method Disclosure of the depreciation method permits informed readers to make comparisons of companies in the same industry. Impact of Income Sum-of-the-Years- Digits Method Units-of-Production Method Straight-Line Method Declining Balance Method L O

13 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Inventory Valuation The selection of an inventory valuation method influences the reported income and the inventory amount shown on the balance sheet. Impact on Income Statement and Balance Sheet LIFOLIFOFIFOFIFO Weighted- Average L O

14 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Basis of Consolidation The basis of consolidation disclosure requires that consolidated financial statements include data from substantially all subsidiary companies. Parent Company $ $ Subsidiary Company 1 $ $ Subsidiary Company 2 $ $ Subsidiary Company 3 $ $ L O

15 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Income Taxes A reconciliation of the statutory income tax rate with the effective tax rate. The Internal Revenue Code is the set of rules for preparing tax returns. financial statement income tax expense. IRS income taxes payable. GAAP is the set of rules for preparing financial statements. Usually... Results in... L O

16 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Employee Benefits The cost of employee pension plans included as an expense in the income statement is disclosed. Present value of benefits at present pay levels. Present value of nonvested benefits at present pay levels. Present value of additional benefits related to projected pay increases. Accumulated Benefit Obligation Projected Benefit Obligation Vested Benefit Obligation L O

17 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Intangibles Including Goodwill When the balance sheet contains intangible assets, including goodwill arising from business acquisitions, the method of recognizing initial cost will be described. Any amortization or impairment in value of the intangibles must be shown. © ©Copyright Patent ® ® Trademark L O

18 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved An explanation of the calculation of EPS may include the details of the computation of weighted-average number of common shares outstanding and the adjustments made to net income for preferred stock, stock options, and convertible securities. Earnings Per Share L O

19 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Segment Information Most large corporations operate in several lines of business and operate in many geographical areas. Segment information should include: 1.Sales to unaffiliated customers, 2.Operating profit, 3.Capital expenditures, 4.Depreciation expense, 5.Identifiable assets. Segment information should include: 1.Sales to unaffiliated customers, 2.Operating profit, 3.Capital expenditures, 4.Depreciation expense, 5.Identifiable assets. L O

20 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Reporting to the SEC Instead of an annual report, companies that are registered with the SEC file an annual Form 10-K. The Form 10-K includes most of the information in the companys annual report and must also comply with additional SEC reporting requirements. L O

21 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Managements Statement of Responsibility The companys management bears ultimate responsibility for the financial statements and notes, not the auditors who express an opinion on the fairness of the presentation of the financial statements. L O

22 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved End of Chapter


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