1. Accounting & Financial Reporting
BUSG 503 Michael Dimond

2. Financial Statements for Sysco (SYY)

3. Financial Statements How much profit did the company make?
How much did they invest in assets?
Was the purchase of equipment an expense?
How are the assets allocated?
How did they finance their assets?
How did cash change during the period?
How did owners’ wealth (equity) change during the period?
What return did the owners get on their investment?

4. Initial questions about the balance sheet
Some companies carry high levels of cash. Why is that? Is there a cost to holding too much cash? Is it costly to carry too little cash?
The relative proportion of short-term and long-term assets is largely dictated by companies’ business models. Why is this the case? Why is the composition of assets on balance sheets for companies in the same industry similar? By what degree can a company’s asset composition safely deviate from industry norms?
What are the trade-offs in financing a company by owner versus non-owner financing? If non-owner financing is less costly, why don’t we see companies financed entirely with borrowed money?
How do shareholders influence the strategic direction of a company? How can long-term creditors influence strategic direction?
Most assets and liabilities are reported on the balance sheet at their acquisition price, called historical cost. Would reporting assets and liabilities at fair market values be more informative? What problems might fair-value reporting cause?

5. Initial questions about the income statement
Assume a company sells a product to a customer who will pay in 30 days. Should the seller recognize the sale when it is made or when cash is collected?
When a company purchases a long-term asset such as a building, its cost is reported on the balance sheet as an asset. Should a company, instead, record the cost of that building as an expense when it is acquired? If not, how should a company report the cost of that asset over the course of its useful life? Manufacturers and merchandisers report the cost of a product as an expense when the product sale is recorded. How might we measure the costs of a product that is sold by a merchandiser? By a manufacturer?
If an asset, such as a building, increases in value, that increase in value is not reported as income until the building is sold, if ever. What concerns arise if we record increases in asset values as part of income, when measurement of that increase is based on appraised values?
Employees commonly earn wages that are yet to be paid at the end of a particular period. Should their wages be recognized as an expense in the period that the work is performed, or when the wages are paid?
Companies are not allowed to report profit on transactions relating to their own stock. That is, they don’t report income when stock is sold, nor do they report an expense when dividends are paid to shareholders. Why is this the case?

6. Initial questions about the statement of cash flows
What is the usefulness of the statement of cash flows? Do the balance sheet and income statement provide sufficient cash flow information?
What types of information are disclosed in the statement of cash flows and why are they important?
What kinds of activities are reported in each of the operating, investing and financing sections of the statement of cash flows? How is this information useful?
Is it important for a company to report net cash inflows (positive amounts) relating to operating activities over the longer term? What are the implications if operating cash flows are negative for an extended period of time?
Why is it important to know the composition of a company’s investment activities? What kind of information might we look for? Are positive investing cash flows favorable?
Is it important to know the sources of a company’s financing activities? What questions might that information help us answer?
How might the composition of operating, investing and financing cash flows change over a company’s life cycle?
Is the bottom line increase in cash flow the key number? Why or why not?

7. Cash Cash: Various forms of cash: LO 1 Readily available to pay debts
Coin and currency on hand
Cash on deposit in the form of checking and savings accounts
Undeposited, cashier, and certified checks
LO 1

8. Cash Equivalents
Investment readily convertible to known amount of cash
Maturity—three months or less
Example:
Commercial paper
Treasury bills issued by the federal government
Money market funds
Six-month bank certificate of deposit would not be a cash equivalent

9. Cash Equivalents on Balance Sheet and Statement of Cash Flows

10. Cash Management Tools of cash management: LO 2 Cash flows statement
Cash budgets
Bank reconciliations
Petty cash funds
LO 2

11. Reading a Bank Statement
Bank statement : a detailed list, provided by the bank, of all activity for a particular account during the month.
Outstanding check : check written by a company but not yet presented to the bank for payment
Deposit in transit : deposit recorded on the books but not yet reflected on the bank statement

12. Bank Reconciliation
Reconcile or resolve any differences between balance on the bank statement with balance shown in the accounting records
Steps used in preparing a bank reconciliation:
Prepare a list of the deposits in transit
Prepare a list of the outstanding checks
Prepare a list of credit memoranda
Prepare a list of debit memoranda
Identify any errors

13. Credit Memoranda and Debit Memoranda
Additions on a bank statement for such items as interest paid on the account and notes collected by the bank for the customer
Debit memoranda
Deductions on a bank statement for items such as NSF checks and various service charges

14. Step 1: Prepare a list of the deposits in transit
Trace deposits listed on the bank statement to the books
Identify the deposits in transit
Any deposits recorded on the books but not yet shown on the bank statement
Add to the bank balance

15. Step 2: Prepare a List of the Outstanding Checks
Arrange the canceled checks in numerical order
Trace each of them to the books
Any checks recorded on the books but not yet listed on the bank statement are outstanding
Subtract from the bank balance

16. Step 3: Prepare a List of Credit Memoranda
List all items, other than deposits, shown as additions on the bank statement
Interest paid by the bank
Amounts collected by the bank for the customer
For these items, bank increases, or credits, its liability to the company on its own books

17. Step 4: Prepare a List of Debit Memoranda
List all amounts, other than canceled checks, shown as subtractions on the bank statement
NSF checks
Service charges
A liability is created on the books of the bank when a company deposits money in a bank
Bank reduces the amount of its liability for these various items and debits the liability on its own books

18. Step 5: Identify any Errors
Identify any errors made by the bank or by the company in recording cash transactions

19. Adjusted balances for book and bank must agree
Bank Reconciliation
Bank Reconciliation
Balance per bank $$$
Adjusted balance $$$
Balance per books $$$
Adjusted balances for book and bank must agree

20. Preparing a Bank Reconciliation

21. Need for Adjustments to the Records
Book adjustments are basis for adjusting entries

22. Petty Cash fund
Money kept on hand for making minor disbursements rather than by writing checks
Periodically, the fund is replenished
When fund is replenished, an adjustment is made to record its replenishment and to recognize the various expenses incurred

23. Internal Control System
Policies and procedures necessary to ensure:
Safeguarding of an entity’s assets
Reliability of accounting records
Accomplishment of overall company objectives
LO 3

24. Sarbanes-Oxley Act of 2002—SOX
An act of Congress in 2002
Intended to bring reform to corporate accountability and stewardship in the wake of a number of major corporate scandals

25. Sarbanes-Oxley Act of 2002—SOX (continued)
Internal control report: a report required by Section 404 of the Sarbanes-Oxley Act
Maintain an adequate internal control structure
Assesses effectiveness of internal control structure
Outside auditors must issue report on company’s internal control

26. Sarbanes-Oxley Act of 2002—SOX (continued)
Public Company Accounting Oversight Board (PCAOB): five-member body created by SOX
Set auditing standards in the United States
Board of directors: consists of key officers of a corporation and outside members responsible for general oversight of the affairs of the entity
Audit committee: a subset of the board of directors
Provides direct contact between the stockholders and the independent accounting firm

27. The Control Environment
Factors that influence internal control:
Management’s competence and operating style
Personnel policies and practices
Board of directors, particularly audit committee

28. The Accounting System
Methods and records used to accurately report entity’s transactions and maintain accountability for assets and liabilities
Use of a journal is an integral part of all accounting systems
Can be completely manual, fully computerized, or a mixture of both

29. Internal Control Procedures
Administrative controls:
Procedures concerned with efficient operation of the business and adherence to managerial policies
Accounting controls:
Procedures concerned with safeguarding the assets or the reliability of the financial statements
LO 4

30. Internal Control System
Important internal control procedures:
Proper authorizations
Segregation of duties
Independent verification
Safeguarding of assets and records
Independent review and appraisal
Design and use of business documents

31. Internal audit staff
Department responsible for monitoring and evaluating the internal control system

32. Business Documents
Crucial link between economic transactions entered into by an entity and the accounting record of those events
Often called source documents
Key feature:
Sequential numbering system
Multiple copies

33. Limitations on Internal Control
Not totally foolproof
Does not ensure prevention of collusion
Maintenance of controls can be costly
Small businesses cannot afford
Human errors can weaken the system
Misunderstood instructions, carelessness, fatigue, and distraction can lead to errors

34. Computerized Documents and Internal Control
All cash receipts should be deposited intact in the bank on a daily basis
Intact means that no disbursements should be made from the cash received from customers
All cash disbursements should be made by check
LO 5

35. Control over Cash Receipts
Most merchandisers receive checks and currency from customers in two ways
Cash received over the counter from cash sales
Cash received in the mail from credit sales
Cash discrepancies
Discrepancies occur occasionally due to theft by dishonest employees and to human error

36. Controlling Cash Disbursements
Purchase Requisition
A form a department uses to initiate a request to order merchandise
Purchase order
A form sent by the purchasing department to the supplier

37. Document Flow for the Purchasing Function

38. Purchase Requisition

39. Purchase Order

40. Invoice
A form sent by the seller to the buyer as evidence of a sale

41. Computer-Generated Receiving Report

42. Blind Receiving Report
A form used by the receiving department to account for the quantity and condition of merchandise received from a supplier

43. Invoice Approval Form
A form the accounting department uses before making payment to document the accuracy of all information about a purchase

44. Check with Remittance Advice
A form used by the receiving department to account for the quantity and condition of merchandise received from a supplier