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PowerPoint Authors:

Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMA

Jon A. Booker, Ph.D., CPA, CIA

Cynthia J. Rooney, Ph.D., CPA

Communicating and InterpretingAccounting Information

Chapter 05

McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

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RegulatorsSecurities and Exchange Commission

Primary ResponsibilityProtect investors and maintain the integrity of the securities market.

Stock ExchangesPrimary Responsibility

Along with state governments, set overall corporate governance

standards.

Financial Accounting Standards BoardPrimary Responsibility

Set Generally Accepted Accounting Standards (GAAP).

Public Company Accounting Oversight BoardPrimary Responsibility

Sets auditing standards for independent auditors (CPAs)

of public companies.

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Managers

ManagementPrimary Responsibility

Responsible for the information in the financial statementsand disclosures.

Chief Executive Officer (CEO): highest officer of thecompany

Chief Financial Officer (CFO): highest officer associatedwith the financial and accounting side of the business

Accounting Staff: prepare the details of the reports andbear professional responsibility for the accuracy of theinformation.

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Board of Directors (Audit Committee)

Board of DirectorsPrimary Responsibility

Responsible for ensuring that processes are in place for

maintaining the integrity of the companys 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 companys

independent auditors. They also meet separately with the

auditors to discuss managements compliance with their

financial reporting responsibilities.

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Independent AuditorsPrimary Responsibility

Follow established auditing standards to assess the fairness of

the financial statements and related presentations

Auditors

An unqualified, or clean,

opinion states that thefinancial statements are

fair presentations in all

material respects in

conformity with GAAP.

UnqualifiedOpinion

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Information Intermediaries: Financial

Analysts and Information Services

Information IntermediariesAnalysis 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.

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Users: Institutional and Private

Investors, Creditors, and Other

Institutional InvestorsIncludes pension, mutual, endowment and other funds that invest on the

behalf of others

Private InvestorsIndividuals who purchase shares in companies

Lenders or CreditorsSuppliers, banks, commercial credit companies, and other financial

institutions that lend money to companies

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Guiding Principles for Communicating

Useful Information

Primary Objective of External Financial Reporting

To provide economic information to external users fordecision making.

Primary Qualitative Characteristics

Relevance: Timely and Predictive Feedback Value

Reliability:Accurate, Unbiased, and Verifiable

Secondary Qualitative Characteristics

Comparability:Across businesses

Consistency: Over time

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Differences in Accounting Methods

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Annual Reports

Forprivately held companies, annualreports are simple documents that include:

1. Four basic financial statements.

2. Related notes (footnotes).3. Report of independent accountants (auditors

opinion) if the statements are audited.

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Annual Reports

Forpubliccompanies, annual reports are elaboratedue to SEC reporting requirements:

1. Nonfinancial Section

Includes a letter to the stockholders, a description of

managements philosophy, products, successes, etc.

2. Financial Section

SEC sets minimum disclosure standards for the

financial section for public companies.

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Annual Reports

1. Summarized financialdata for 5- or 10-years.

2. Management Discussionand Analysis (MD&A).

3. The four basic financialstatements.

4. Notes (footnotes).

5. Independent Accountants

Report and theManagementCertification.

6. Recent stock price

information.7. Summaries of the

unaudited quarterlyfinancial data.

8. Lists of directors andofficers of the companyand relevant addresses.

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SEC Reports 10-K, 10-Q, 8-K

Form 10-K Annual ReportDue 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 8-K Current Report

Due within 15 days of the major event date.Financial statements can be unaudited.

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Classified Balance Sheet

Assets used of turned into

cash within one year.Assets used of turned into

cash beyond one year.

Obligations paid of

settled within one year.

Obligations paid of

settled after one year.

Contributed capital..

Reinvested earnings.

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Classified Income Statement

Net sales

Cost of goods sold

Gross profit

Operating expenses

Income from operations

Nonoperating revenues/expenses and gains/lossesIncome before income taxes

Income tax expense

Net income

Income Statements are prepared using thefollowing basic structure.

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Consolidated Income Statement

Operating

activities the

focus of the

business.

Net Income Average Number of Shares Outstanding

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Nonrecurring Items

Income statements may contain three sections:

1. Continuing operations

2. Nonrecurring Items

a) Discontinued operations

b) Extraordinary items

3. Earnings per share

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Earnings Per Share

EPS =Net Income*

Average Number of Shares of Common StockOutstanding During the Period

Basic EPS

*If there are preferred dividends, theamount is subtracted from the Net

Income in the numerator.

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Statement of Cash Flows

Recall that the Statement of Cash Flows is

divided into threemajor sections.

1. Cash flows from operating activities.

2. Cash flows from investing activities.

3. Cash flows from financing activities.

We will examine the indirect method of preparing the statement.This format begins with a reconciliation of accrual income to cash

flows from operations.

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Cash flows

associated with

earning income.

Cash flows related to

purchase and sale of

productive assets

and investments.

Cash flows related toborrowing and

repaying loans and

issue and repurchase

of stock.

Change in the cash

account.

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Accounting Rules Applied in the

Companys Statements

One of the first notes to the financial statements is usually

the statement of significant account policies.

This particular note relates to the Callaway Golfs policies

regarding depreciation of Property, Plant, and Equipment.

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Additional Detail Supporting

Reported Numbers

The second category of notes provides supplemental

information concerning the data shown on the financial

statements.

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Return on Assets (ROA) Analysis

1(beginning total assets + ending total assets) 2

Returnon

Assets=

Net Income*

Average Total Assets1

*(In complex calculations, interest expense (net of tax) and minority interestare added back to net income.

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ROA Profit Driver Analysis

ROANet ProfitMargin

AssetTurnover

=

Net IncomeAverage

Total AssetsNet IncomeNet Sales

Net SalesAverage

Total Assets

=

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Profit Drivers and Business Strategy

High-Value or Product-DifferentiationRely on R&D and product promotion to

convince customers of the superiority of

your product.Low-Cost Strategy

Rely on efficient management of accounts

receivable, inventory and productive assetsto produce high asset turnover.

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Discontinued Operations

Income or loss onsegments operation for

the period.

Gain or loss ondisposal of the

segment.

Sale or abandonment of a segment of a

business.

Show net of applicable taxes.

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Extraordinary Items

Unusual Infrequent

Show net of applicable taxes.

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Reporting Extraordinary Items and

Discontinued Operations

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End of Chapter 05