communicating and interpreting accounting information · primary objective of external financial...

COMMUNICATING

AND

INTERPRETING

ACCOUNTING

INFORMATION

Chapter 5

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin Slide 2

Management Preparation

CEO, CFO, Accounting Staff Guided by GAAP

PLAYERS IN THE ACCOUNTING COMMUNICATION PROCESS


Independent Auditors Verification

Partners, Managers, Staff Guided by GAAS



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.






Gold

Standard


Information Intermediaries

Analysis and Advice Financial analysis,

Information services







http://www.pwc.com/us/en/

http://www.ey.com/US/EN/Home

http://www.deloitte.com/view/en_US/us/index.htm

http://www.czsg.com/_training/aussteller.asp

http://www.bdo.com/

http://www.grantthornton.com/portal/site/gtcom/menuitem.a8ee697a92b73ac9b217bfae633841ca/?vgnextoid=b17acbbdad9c4010VgnVCM100000368314acRCRD&vgnextfmt=default

http://mcgladrey.com/

http://www.crowehorwath.com/

http://www.plantemoran.com/Pages/default.aspx



Information services Financial analysts make predictions

concerning companies’ future earnings and stock prices.






http://www.piperjaffray.com/

http://www2.goldmansachs.com/

http://www.jpmorgan.com/











Web Info Services: www.sec.gov; www.compustat.com;

www.finance.yahoo.com; www.bloomberg.com;

www.hoovers.com; www.factiva.com





CFO, CEO, Accounting Staff Guided by GAAP

Government Regulators Verification

SEC Members Guided by SEC regs.

Users Analysis and Decision

Investors, Lenders, etc. Public companies only




The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

http://commons.wikimedia.org/wiki/Image:United_States_Securities_and_Exchange_Commission.svg


REGULATORS

http://www.epa.gov/

http://www.usgs.gov/

http://www.bea.gov/index.htm

http://www.dol.gov/

http://www.rrb.gov/default.asp


ENSURING THE INTEGRITY OF FINANCIAL

INFORMATION COMMUNICATION PROCESS

Regulators Standard Setting and

Verification SEC

Management Primary Responsibility

CFO, CEO, Accounting staff

Auditors (CPAs) Verification

Partners, Managers, Staff

Directors Oversight

Audit Committee (Independent directors)

Stock Exchanges Corporate

Governance Standards

FASB Accounting Standards

PCAOB Auditing Standards


USERS: INSTITUTIONAL AND PRIVATE

INVESTORS, CREDITORS, AND OTHERS

Management Primary Responsibility

CFO, CEO, Accounting Staff


Analysis and Advice Financial analysts,


Users Analysis and Decision Institutional and private

investors, Lenders, Suppliers, Customers, etc.

As directed by the Sarbanes-Oxley Act of 2002, the SEC is adopting rules that require conformance with specific sections of the Act. These rules require officers to certify that they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the issuer's internal controls; that they have made certain disclosures to the issuer's auditors and the audit committee of the board of directors about the issuer's internal controls; and that they have included information in the issuer's quarterly and annual reports about their evaluation and whether there have been significant changes in the issuer's internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation.

http://www.pcaobus.org/index.aspx

http://www.sarbanes-oxley.com/


GUIDING PRINCIPLES FOR COMMUNICATING

USEFUL INFORMATION

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

Secondary Qualitative Characteristics Comparability: Across businesses

Consistency: Over time


Primary Qualitative Characteristics Relevance: Timely and Predictive Feedback Value


http://www.nscorp.com/nscorphtml/pdf/Investors/annual-report-2010.pdf


Primary Objective of External Financial Reporting To provide economic information to external users

for decision making.

GUIDING PRINCIPLES FOR COMMUNICATING

USEFUL INFORMATION

Primary Qualitative Characteristics Relevance: Timely and Predictive and Feedback Value




The full-disclosure principles require . . . 1.A complete set of financial statements,

and 2.Notes to the financial statements


INTERNATIONAL ACCOUNTING STANDARDS

BOARD AND GLOBAL DIFFERENCES IN

ACCOUNTING STANDARDS

Extraordinary items Permitted ProhibitedLIFO for inventory Permitted ProhibitedReversal of inventory write-downs Prohibited RequiredBasis of property, plant, and equipment Historical cost Fair Value or

( Evo lving Fair V alue) Historical cost

International Financial Reporting Standards


Refer to Note 2 to the consolidated financial statements for information pertaining to accounting changes effective in 2010, and Notes 2 and 31 to the consolidated financial statements for information on issued accounting pronouncements that will be effective in future years. Of particular note is the area of International Financial Reporting Standards (IFRSs), which will be adopted by us in 2011. The US Securities and Exchange Commission (SEC) allows foreign private issuers to use IFRSs, without reconciliation to US GAAP, provided that their foreign private issuer status is maintained. The company has established a project team that is led by finance management and includes representatives from various areas of the organization. An external resource has also been engaged to assist, under the direction of company management, with certain aspects of the project. The audit committee of the Board of Directors regularly receives progress reporting on the status of the IFRSs implementation project. The implementation project consists of three primary phases: the scoping and diagnostic phase (high-level impact assessment to identify key areas); the impact analysis, evaluation and design phase (project teams develop policy alternatives, draft financial statement content and determine changes to existing accounting policies, information systems and business processes); and the implementation and review phase (implement and approve changes to accounting policies, information systems, business processes and training programs, develop IFRSs-compliant financial statements and obtain audit committee approval). The company is now in the implementation and review phase.

http://www.potashcorp.com/


ANNUAL REPORTS

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.


ANNUAL REPORTS

For public companies, annual reports are elaborate due to SEC reporting

requirements:

1. A Nonfinancial Section

A letter to the stockholders, a description of management’s philosophy, products, successes, etc.

2. A Financial Section

See next slide for a detailed listing . . .


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.

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.


QUARTERLY REPORTS

Usually begin with short letter to stockholders

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.


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-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.


(in thousands, except share data and per share data) 2006 2005

ASSETSCurrent assets:

Cash and cash equivalents 46,362$ 49,481$ Accounts receivable, net 118,133 98,082 Inventories, net 265,110 241,577 Other current assets 63,595 49,450 Total current assets 493,200 438,590

Property, plant and equipment, net 131,224 127,739 Intangible assets, net 175,159 175,191 Other assets 46,364 22,978

845,947$ 764,498$

Consolidated Balance SheetDecember 31,

Callaway Golf Company

CLASSIFIED BALANCE SHEET



LIABILITIES & STOCKHOLDERS" EQUITYCurrent Liabilities:

143,455$ 140,184$ 80,000 21

Total current liabilities 223,455 140,205 Long-term liabilities:

Other liabilities 43,388 28,245 Minority interest 1,987 Commitment and contingencies (Note13)

Callaway Golf CompanyConsolidated Balance Sheet

December 31,

Notes payable, current portion

Accounts payable and accrued expenses




SHAREHOLDERS' EQUITYShareholders' equity:

Common stock, $.01 par value, 85,096,782 and 84,950,694 issued and outstanding at December 31, 2006 and 2005, respectively 851$ 850$ Additional paid-in capital 141,192 164,202 Retained earnings 435,074 430,996 Total shareholders' equity 577,117 596,048

Total liabilities and shareholders' equity 845,947$ 764,498$

Consolidated Balance SheetDecember 31,

Callaway Golf Company


Contributed

capital is

normally shown

in two

accounts:

1.Common

Stock

2.Additional

Paid-in Capital


CLASSIFIED INCOME STATEMENT

Income statements may contain three sections:

1. Continuing operations

2. Nonrecurring Items

A. Discontinued operations

B. Extraordinary items

3. Earnings per share


CLASSIFIED INCOME STATEMENT

Net sales− Cost of goods sold

Gross profit (Gross margin)− Operating expenses

Income from operations± Nonoperating revenues/expenses and gains/losses

Income before income taxes− Income tax expense

Net income

General Format for the Classified Income Statement

S -COGS GM

-OPEX OPIN

+-NONOP IBT

-INTAX NI


EARNINGS PER SHARE

EPS = Net Income*

Average Number of Shares of Common Stock Outstanding During the Period

Basic EPS

*If there are preferred dividends, the amount is subtracted from the Net Income in the numerator.


COMMON-SIZE INCOME STATEMENT

Revenues: Sales revenue 66,000$ 94.56% Rental income 3,800 5.44% Total revenues 69,800 100.00%Costs and expenses: Cost of sales 36,000 51.58% Salaries & benefits expense 16,000 22.92% General & administrative expenses 8,100 11.60% Depreciation expense 2,500 3.58% Total costs and expenses 62,600 89.68%Operating income 7,200 10.32%Other revenues and gains (expenses and losses) Investment income 1,000 1.43% Interest expense (60) -0.09% Gain on sale of land 3,000 4.30%Income before income taxes 11,140 15.96% Income tax expense 3,899 5.59%Net income 7,241$ 10.37%

Earnings per share 0.40$

Matrix, InternationalIncome Statement

Month Ended January 31, 2009

Total revenue is equal to 100%.


STATEMENT OF CASH FLOWS

Recall that the Statement of Cash Flows is

divided into three major 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.


CALLAWAY GOLF COMPANYConsolidated Statement of Cash FlowsFor the Year Ended December 31(in thousands)

2006Cash flows from operating activities:Net income 23,290$ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization 32,274 Other non-cash items 14,035 Changes in assets and liabilities, net of effects from acquisitions: Accounts receivable, net (12,128) Inventories, net (16,842) Other assets (4,475) Accounts payable and accrued expenses (10,803) Income taxes payable (6,936) Other liabilities (1,128) Net cash provided by operating activities 17,287$


CALLAWAY GOLF COMPANYConsolidated Statement of Cash FlowsFor the Year Ended December 31(in thousands)

2006Cash flows from operating activities:Net income 23,290$ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization 32,274 Other non-cash items 14,035 Changes in assets and liabilities, net of effects from acquisitions: Accounts receivable, net (12,128) Inventories, net (16,842) Other assets (4,475) Accounts payable and accrued expenses (10,803) Income taxes payable (6,936) Other liabilities (1,128) Net cash provided by operating activities 17,287$

Change in Account Balance During YearIncrease Decrease

Current Subtract from net Add to net income.Assets income.

Current Add to net income. Subtract from netLiabilities income.


Consolidated Statement of Cash Flows2006

Cash flows from investing activities Capital expenditures (32,453)$ Acquisition, net of cash acquired 374 Investment in marketable securities (10,008) Proceeds from sale of assets 469 Net cash used in investing activities (41,618)$

Cash flows from financing activities: Issuance of common stock 9,606 Acquisition of treasury stock (52,872) Proceeds from line of credit (net) 80,000 Other financing activities 2,549 Dividends paid, net (19,212) Net cash used in financing activities 20,071$ Effect of exchange rate changes on cash 1,141 Net decrease in cash and cash equivalents (3,119) Cash and cash equivalents at beginning of year 49,481 Cash and cash equivalents at end of year 46,362$


NOTES TO FINANCIAL STATEMENTS

Descriptions of the key accounting rules that apply to the company’s statements.

Additional detail supporting reported numbers.

Relevant financial information not disclosed on the statements.


RETURN ON ASSETS (ROA) ANALYSIS

1(beginning total assets + ending total assets) ÷ 2

Return on

Assets =

Net Income*

Average Total Assets1

ROA measures how much the firm earned for each

dollar of investment.

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


ROA PROFIT DRIVER ANALYSIS

ROA Net Profit Margin

Asset Turnover

= ×

Net Income Average

Total Assets Net Income Net Sales

Net Sales Average

Total Assets

×

=


PROFIT DRIVERS AND BUSINESS STRATEGY

High-value or product-differentiation.

Rely on R&D and product promotion to convince customers of the superiority of your product.

Low-Cost.

Rely on efficient management of accounts receivable, inventory and productive assets to produce

high asset turnover.


Net sales− Cost of goods sold

Gross profit− Operating expenses

Income from operations± Nonoperating revenues/expenses and gains/losses

Income before income taxes− Income tax expense

Net income

General Format for the Classified Income Statement

CHAPTER SUPPLEMENT: NONRECURRING

ITEMS

In addition, companies may have nonrecurring items. These nonrecurring items may include:

1. Discontinued operations, 2. Extraordinary items,

These items are reported separately because they are not useful in predicting future income of the company.


DISCONTINUED OPERATIONS

Income or loss on segment’s operation for

the period.

Gain or loss on disposal of the

segment.

Sale or abandonment of a segment of a business.

Show net of applicable taxes.


EXTRAORDINARY ITEMS

Unusual Infrequent

Show net of applicable taxes.

I think I am allergic to Accounting !!!

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