1. 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 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Communicating and Interpreting Accounting Information Chapter 5

2. 5-2 Players in the Accounting Communication Process

3. 5-3 Regulators Securities and Exchange Commission (FEC) Primary Responsibility Protect investors and maintain the integrity of the securities market. Primary Responsibility Stock Exchanges Primary Responsibility Along with state governments, set overall corporate governance standards. Financial Accounting Standards Board (FASB) Primary Responsibility Primary Responsibility Set Generally Accepted Accounting Standards (GAAP). Primary Responsibility Public Company Accounting Oversight Board(PCAOB) Primary Responsibility Sets auditing standards for independent auditors (CPAs) of public companies.

4. 5-4 Managers Management Primary Responsibility 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 bear professional responsibility for the accuracy of the information. Management Primary Responsibility 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 bear professional responsibility for the accuracy of the information.

5. 5-5 Board of Directors (Audit Committee) Board of Directors Elected by the stockholders to represent their interests Board of Directors Elected by the stockholders to represent their interests

6. 5-6 Board of Directors (Audit Committee) Board of Directors Primary Responsibility Responsible for ensuring that processes are in place for maintaining the integrity of the company’s accounting, financial statement preparation, and financial reporting. Board of Directors Primary Responsibility Responsible for ensuring that processes are in place for maintaining the integrity of the company’s 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 company’s independent auditors. They also meet separately with the auditors to discuss management’s compliance with their financial reporting responsibilities. Board of Directors (Audit Committee) Primary Responsibility Is composed of non-management (independent) directors with financial knowledge and is responsible for hiring the company’s independent auditors. They also meet separately with the auditors to discuss management’s compliance with their financial reporting responsibilities.

7. 5-7 Independent Auditors Primary Responsibility Follow established auditing standards to assess the fairness of the financial statements and related presentations Independent Auditors Primary Responsibility Follow 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. Unqualified Opinion

8. 5-8 Information Intermediaries: Financial Analysts and Information Services Information Intermediaries Analysis 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. Information Intermediaries Analysis 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. Earning Forecastings. Predictions of earning for future accounting periods. Earning Forecastings. Predictions of earning for future accounting periods.

9. 5-9 Users: Institutional and Private Investors, Creditors, and Other Institutional Investors Mangers of pension, mutual, endowment and other funds that invest on the behalf of others Institutional Investors Mangers of pension, mutual, endowment and other funds that invest on the behalf of others Private Investors Individuals who purchase shares in companies Private Investors Individuals who purchase shares in companies Lenders or Creditors Suppliers, banks, commercial credit companies, and other financial institutions that lend money to companies Lenders or Creditors Suppliers, banks, commercial credit companies, and other financial institutions that lend money to companies

10. 5-10 Guiding Principles for Communicating Useful Information Primary Objective of External Financial Reporting To provide economic information to external users for decision making. Primary Objective of External Financial Reporting To provide economic information to external users for decision making. Primary Qualitative Characteristics Relevance: Timely and Predictive Feedback Value Reliability: Accurate, Unbiased, and Verifiable Primary Qualitative Characteristics Relevance: Timely and Predictive Feedback Value Reliability: Accurate, Unbiased, and Verifiable Secondary Qualitative Characteristics Comparability: Across businesses Consistency: Over time Secondary Qualitative Characteristics Comparability: Across businesses Consistency: Over time

11. 5-11 Differences in Accounting Methods

12. 5-12 Annual Reports For privately held companies, annual reports are simple documents that include: For privately held companies, annual reports are simple documents that include: 1. Four basic financial statements. 2. Related notes (footnotes). 3. Report of independent accountants (auditor’s opinion) if the statements are audited.

13. 5-13 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.

14. 5-14 Annual Reports 1.Summarized financial data for 5- or 10-years. 2.Management Discussion and Analysis (MD&A). 3.The four basic financial statements. 4.Notes (footnotes). 5.Independent Accountant’s Report and the Management Certification. 1.Summarized financial data for 5- or 10-years. 2.Management Discussion and Analysis (MD&A). 3.The four basic financial statements. 4.Notes (footnotes). 5.Independent Accountant’s Report and the Management Certification. 6.Recent stock price information. 7.Summaries of the unaudited quarterly financial data. 8.Lists of directors and officers of the company and relevant addresses. 6.Recent stock price information. 7.Summaries of the unaudited quarterly financial data. 8.Lists of directors and officers of the company and relevant addresses.

15. 5-15 Quarterly Reports Usually begin with short letter to stockholders Usually begin with short letter to stockholders Condensed unaudited income statement and balance sheet for the quarter. Condensed unaudited income statement and balance sheet for the quarter. Often, cash flow statement and statement of stockholders’ equity are omitted. Some notes to the financial statements also may be omitted. Often, cash flow statement and statement of stockholders’ equity are omitted. Some notes to the financial statements also may be omitted. Usually begin with short letter to stockholders Usually begin with short letter to stockholders Condensed unaudited income statement and balance sheet for the quarter. Condensed unaudited income statement and balance sheet for the quarter. Often, cash flow statement and statement of stockholders’ equity are omitted. Some notes to the financial statements also may be omitted. Often, cash flow statement and statement of stockholders’ equity are omitted. Some notes to the financial statements also may be omitted.

16. 5-16 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 15 days of the major event date. Financial statements can be unaudited. Form 8-K Current Report Due within 15 days of the major event date. Financial statements can be unaudited.

17. 5-17 ROA Profit Driven Analysis ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. ROA Net profit Margin Net Sales Total Average Asset Net Income Net Sales Net Income Average Total Asset Total Asset Turnover

18. 5-18 ROA Net Profit margin : Measure how much of every sales dollars is profit. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. It can increased by :  Increasing sales value.  Increasing sales price.  Decreasing cost of goods sold and operating expenses.

19. 5-19 ROA Total asset Turnover: Measure how many sales dollars the company generate with each dollar of Assets. The Asset Turnover ratio is an indicator of the efficiency with which a company is deploying its assets It can increased by :  Collecting accounts receivable more quickly.  Centralizing distributors to reduce inventory kept on hand.  Consolidation production facilities in fewer factories to reduce the amount of assets necessary to generate each dollar of sale.

20. 5-20 End of Chapter 5