Additional Aspects of Financial Reporting and Financial Analysis C hapter 6.

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Presentation transcript:

Additional Aspects of Financial Reporting and Financial Analysis C hapter 6

2 Auditor’s Report (Opinion) 1.That the company maintained effective internal control over its financial reporting 2.That the company’s financial statements present fairly the financial position of the company and the results of its operations and cash flows in conformity with GAAP

3 Management is responsible for internal control and for preparing and presenting the financial statements. Responsibilities of Management

4 1.Has a reliable accounting system 2.Maintains records in reasonable detail 3.Has a process for providing reliable financial statements prepared according to GAAP 4.Has adequate procedures for preventing or detecting significant unauthorized acquisition, use, or disposal of its assets Internal Control

5 The first (introductory) paragraph lists the financial statements that were audited, indicates that internal control was audited, declares that management is responsible for the financial statements and related internal control, and asserts that the auditor is responsible for expressing an opinion on them. Auditor’s Report (Opinion)

6 The second (scope) paragraph describes what the auditor has done. The third (definition) paragraph identifies internal control over financial reporting, including policies and procedures. Auditor’s Report (Opinion) The fourth (inherent limitations) paragraph discusses the possibility that internal control may not prevent or detect misstatements of the financial statements. The fifth (opinion) paragraph gives the auditor’s opinions.

7 1.An unqualified opinion is not a “clean bill of health.” 2.An unqualified opinion provides no assurance of the future success of the company. 3.An audit report does not provide an assurance that fraud has not been committed by a member, or members, of the company unless such fraud would cause a material misstatement in the financial statements. Auditor’s Report (Opinion)

8 Audit Committee and Management’s Report  The SEC requires all publicly held companies to have an audit committee, which is a group that has oversight over the financial reporting process of a company.  Most audit committee members usually are “outside directors” (not officers or employees of the company).

9 Audit Committee and Management’s Report  The audit committee acts as the liaison between the auditor and management.  The preparation and presentation of a company’s financial statements are the responsibility of its management.

10 A company’s financial statements might be disaggregated in a number of ways, such as by products and services, geography, legal entity, or type of customer. Segment Reporting

11 1.That engages in business activities to earn revenues and incur expenses 2.Whose operating results are regularly reviewed by the company’s chief operating officer to make decisions about allocating resources to the segment and assessing its performance 3.For which financial information is available An operating segment is a component of a company: Segment Reporting

12 An operating segment is significant and is a reportable segment if it satisfies at least one of the following tests: 1.Revenue Test. Its reported revenues are 10% or more of the combined revenues of all the company’s reported operating segments. Segment Reporting

13 An operating segment is significant and is a reportable segment if it satisfies at least one of the following tests: 2.Profit Test. The absolute amount of its profit (loss) is 10% or more of the combined reported profits of all operating segments that did not report a loss. Segment Reporting

14 An operating segment is significant and is a reportable segment if it satisfies at least one of the following tests: 3.Asset Test. Its segment assets are 10% or more of the combined assets of all operating segments. Segment Reporting

15 Interim Financial Statements Interim financial statements are required of all publicly held companies on a quarterly basis.

16 Interim Income Taxes To present fairly the results of operations, at the end of each interim period a company must make its best estimate of the effective income tax rate to be applicable for the entire year.

17 1.Estimated Annual Income: First quarter$ 20,000actual income Second quarter26,000actual income Third quarter25,000estimated income Fourth quarter 29,000estimated income $100,000estimated annual income Interim Income Taxes The tax rates are 15% on the first $20,000 and 30% on income over $20,000.

18 2.Estimated Effective Income Tax Rate: 15% × $20,000 = $ 3,000 30% × ($100,000 – $20,000) = 24,000 Estimated total tax for the year = $27,000 27% Effective tax rate = $27,000 Estimated income tax $100,000 Estimated income Interim Income Taxes

19 $12,420 estimated income tax on first six months of income (5,220)estimated income tax on first-quarter income (using annual estimate at that time) $ 7,200 estimated income tax on second- quarter income 4.Estimated Income Tax for Second Quarter: 3.Estimated Income Tax for First Six Months: $46,000 × 27% = $12,420 estimated income tax on first six months’ income Interim Income Taxes

20 When publicly held companies report interim summaries of financial information, the following data must be reported at a minimum. Preparation and Disclosure of Summarized Interim Financial Data

21 Sales or gross revenues, income taxes, extraordinary items (net of tax), and net income Earnings per share for each period presented Seasonal revenues, costs, and expenses Significant changes in estimates of income taxes Preparation and Disclosure of Summarized Interim Financial Data Results of discontinued operations and material unusual or infrequent items

22 Contingent items Significant changes in financial position (cash flows) Preparation and Disclosure of Summarized Interim Financial Data Changes in accounting principles or estimates

23 Form 10-K is the most common SEC annual report form and is required to be filed with the SEC within 60 days of a company’s fiscal year-end. SEC Reports

24 Form 10-Q is used to report a company’s quarterly financial information to the SEC and is required to be filed within 40 days of the end of the company’s first three fiscal quarters. SEC Reports

25 IFRS vs. U.S. GAAP  IFRS and GAAP require segment reporting.  IFRS require a company to disclose each segment’s liabilities if that information is regularly provided to the chief operating decision maker. U.S. GAAP has no such requirement.

26 IFRS vs. U.S. GAAP  For interim reporting, IFRS differ from U.S. GAAP in that they do no allow: –The allocation of expenses between interim periods –The deferral of manufacturing variances that are expected to be offset in a later interim period –The deferral of a temporary market decline in inventory that is expected to be recovered in a later interim period.