© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Chapter 5 Communicating and Interpreting Accounting Information

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Financial Statement Formats Let’s look at the asset section of a classified balance sheet.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Current assets are assets that will be turned into cash or expire (be used up) within one year or the operating cycle, whichever is longer.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Property, plant and equipment includes assets with useful lives of more than one year acquired for use in the business rather than for resale.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Other assets may include intangible assets such as patents, copyrights, etc.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Let’s look at the liability section of a classified balance sheet.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Current liabilities are obligations that will be paid with current assets, normally within one year.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Long-term liabilities are debts that have maturity dates extending beyond one year from the balance sheet date.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Let’s look at the shareholders’ equity section of a classified balance sheet.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Share capital (or capital stock) reflects the monetary value of contributions made by shareholders.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Retained earnings are the accumulated earnings of the company less the accumulated dividends declared.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Liquidity Liquidity refers to a company’s ability to meet its current maturing debts. Tests of liquidity include:

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Debt Contracts When companies enter into a debt contract, they often agree to specific restrictions to protect the creditors. Examples include maintaining a specified cash balance or current ratio.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Classified Income Statement Income statements have up to four major sections: Ê Continuing operations Ë Discontinued operations Ì Extraordinary items Î Earnings per share Income statements have up to four major sections: Ê Continuing operations Ë Discontinued operations Ì Extraordinary items Î Earnings per share

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Continuing Operations Now, let us look at two common formats for presenting the continuing operations section. ÊSingle-step ËMultiple-step Now, let us look at two common formats for presenting the continuing operations section. ÊSingle-step ËMultiple-step

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson In the single-step format, all revenues and gains are listed first. All expenses and losses are listed next and subtracted from total revenues to compute net income. In the single-step format, all revenues and gains are listed first. All expenses and losses are listed next and subtracted from total revenues to compute net income.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Revenue or net sales are gross sales minus any discounts and returns and during the period. Cost of sales is the cost of inventory sold during the period. Selling expenses include all amounts incurred related to sales activities. General and admini. expenses include all amounts incurred for the overall business. The provision for income taxes represents the tax expense related to the continuing operations of the company.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Classified Income Statement Now that we have discussed the continuing operations section, let us discuss the other major sections of the income statement.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Discontinued Operations Income or loss on the segment’s operation for the period. Gain or loss on disposal of the segment. Gain or loss on disposal of the segment. Sale or abandonment of a segment of a business. Show net of tax effect.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Extraordinary Items Unusual and Infrequent Outside Management’s Control Show net of tax effect.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Return on Equity (ROE) Compute the 2001 ROE for Intrawest. Intrawest’s 2001 net income is $60,587. Beginning shareholders’ equity is $511,272. Ending shareholders’ equity is $568,362.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Return on Equity (ROE) Compute the 2001 ROE for IntraWest. IntraWest’s 2001 net income is $60,587. Beginning shareholders’ equity is $511,272. Ending shareholders’ equity is $568,362.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Earnings Per Share (EPS) See Example

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Earnings per share

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson This statement reports the change in retained earnings that results from the net income (or loss) for the period less any distribution of dividends. Other changes that do not affect the operations of the current period are also reported in this statement. This statement reports the change in retained earnings that results from the net income (or loss) for the period less any distribution of dividends. Other changes that do not affect the operations of the current period are also reported in this statement.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Here is the operating activities section of the cash flow statement. Intrawest uses the indirect method. This method eliminates all non-cash components of income.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Here is the rest of Intrawest’s cash flow statement.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Notes to Financial Statements Significant accounting policies used by the company Additional detail concerning the data shown on the financial statements Other relevant financial information concerning long-term assets, long- term debt, pension funds, share capital, subsequent events, etc.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Players in the Accounting Communication Process An unqualified opinion states that the financial statements are fair presentations in all material respects in conformity with GAAP. Independent Auditors Verification Partners, Managers, Staff Guided by GAAS Independent Auditors Verification Partners, Managers, Staff Guided by GAAS Management Preparation CFO, CEO, Accounting Staff Guided by GAAP Management Preparation CFO, CEO, Accounting Staff Guided by GAAP

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Information Intermediaries Analysis and Advice Financial analysis, Information services Information Intermediaries Analysis and Advice Financial analysis, Information services Independent Auditors Verification Partners, Managers, Staff Guided by GAAS Independent Auditors Verification Partners, Managers, Staff Guided by GAAS Management Preparation CFO, CEO, Accounting Staff Guided by GAAP Management Preparation CFO, CEO, Accounting Staff Guided by GAAP Players in the Accounting Communication Process Financial analysts make predictions concerning companies’ future earnings and stock prices.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Information Intermediaries Analysis and Advice Financial analysis, Information services Information Intermediaries Analysis and Advice Financial analysis, Information services Government Regulators Verification Provincial securities staff Guided by securities regulations Government Regulators Verification Provincial securities staff Guided by securities regulations Users Analysis and Decision Investors, Lenders, etc. Users Analysis and Decision Investors, Lenders, etc. Independent Auditors Verification Partners, Managers, Staff Guided by GAAS Independent Auditors Verification Partners, Managers, Staff Guided by GAAS Management Preparation CFO, CEO, Accounting Staff Guided by GAAP Management Preparation CFO, CEO, Accounting Staff Guided by GAAP Players in the Accounting Communication Process Public companies only

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson 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, Predictive and has Feedback Value Reliability: Accurate, Unbiased, and Verifiable Primary Qualitative Characteristics Relevance: Timely, Predictive and has 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 The full-disclosure principle requires (a) a complete set of financial statements and (b) notes to the financial statements. The full-disclosure principle requires (a) a complete set of financial statements and (b) notes to the financial statements.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson The Disclosure Process Press Releases are used to announce quarterly and annual earnings as soon as the verified figures are available. Real World Excerpt The Financial Post, September 11, 2001, C7 Intrawest keeps profit growth streak alive VANCOUVER-Intrawest Corp., operator of such major North American mountain resorts as British Columbia’s Whistler Blackcomb, yesterday posted a 16.5% rise in profit for the past fiscal year.... On the Toronto stock market yesterday, Intrawest shares closed at $28.05, down 30 cents. Real World Excerpt The Financial Post, September 11, 2001, C7 Intrawest keeps profit growth streak alive VANCOUVER-Intrawest Corp., operator of such major North American mountain resorts as British Columbia’s Whistler Blackcomb, yesterday posted a 16.5% rise in profit for the past fiscal year.... On the Toronto stock market yesterday, Intrawest shares closed at $28.05, down 30 cents.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Annual Reports For privately held companies, annual reports are simple documents that include: l Four basic financial statements l Related footnotes l Report of independent accountants (auditor’s opinion) For privately held companies, annual reports are simple documents that include: l Four basic financial statements l Related footnotes l Report of independent accountants (auditor’s opinion)

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Annual Reports For public companies, annual reports are more elaborate with greater SEC requirements: l A Nonfinancial Section A letter to the shareholders, a description of management’s philosophy, products, successes, etc. l A Financial Section See next slide for a detailed listing... For public companies, annual reports are more elaborate with greater SEC requirements: l A Nonfinancial Section A letter to the shareholders, a description of management’s philosophy, products, successes, etc. l A Financial Section See next slide for a detailed listing...

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Annual Reports Summarized financial data Management Discussion and Analysis The four basic financial statements Notes Independent Accountant’s Report Summarized financial data Management Discussion and Analysis The four basic financial statements Notes Independent Accountant’s Report Recent stock price information Summaries of the unaudited quarterly financial data Lists of directors and officers of the company and relevant addresses Recent stock price information Summaries of the unaudited quarterly financial data Lists of directors and officers of the company and relevant addresses The Financial Section of a public company’s annual report includes:

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson The End of Chapter 5 Maybe I should issue a press release to disclose my identity!