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Introduction
To Financial Statements
Understanding Financial Statements1
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Understanding Financial Statements2
Types of Companies Public Private
Financial statements conforming to public company statements
Non-profits
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Understanding Financial Statements3
Important Terms Unaudited Audited Accountants Certified Public Accountants (CPAs) GAAP, FASB, AICPA, PCAOB
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Understanding Financial Statements4
Sarbanes-Oxley Act of 2002 Response to abuses with Enron and
WorldCom as catalysts New responsibilities and resources for
SEC Created PCAOB Major emphasis on “internal controls” More disclosure for public companies
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Understanding Financial Statements5
Sarbanes-Oxley Act Analysts must disclose potential conflicts of
interest Limited types of services accounting firms
can provide to public company clients CEO, CFO attest to accuracy, completeness,
fairness of financial statements Rigorous penalties for fraud, other misdeeds
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Understanding Financial Statements6
Public Company Accounting Oversight Board Created by SOX to oversee accounting SEC appoints members to five-year terms Five full-time members including a chairman Two must be or have been CPAs All members must be “financially literate” Began operating May 2003
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Key SEC Documents 10-K 10-Q 8-K Proxy statement Prospectus
Understanding Financial Statements7
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Understanding Financial Statements8
Annual Report (or 10-K) Strategy Auditor’s report Management’s discussion and analysis Financial statements and footnotes Management’s letter if annual report
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Basic Auditor’s Report Independent auditor’s opinion on whether
financial statements are presented fairly in all material respects, in accordance with GAAP:
We looked at these statements They’re management’s responsibility; we’re
just here to express our opinion We followed the rules in our audits and here’s
what an audit involves In our opinion, the statements fairly present
the company’s position
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Auditor’s Report by Category Clean or Unqualified Qualified Disclaimer Adverse
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New Auditor’s Report Combines traditional report with internal
controls requirement of Sarbanes-Oxley Act
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Understanding Financial Statements12
MD&A Must read it Often a source of good information and
insights Densely written SEC says it wants greater transparency
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Understanding Financial Statements13
Goal of Accounting Record, classify and report financial
transactions. To provide managers across the organization with information that facilitates: Control of activities and expenditure Refinement of operational plans Accountability Reporting on project outcomes Writing of bids for new funds
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Understanding Financial Statements14
Goal of Finance Maximize shareholder wealth as
reflected in market price of the stock Achieving this goal requires financial
manager to focus on economic profit, not accounting profit
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Understanding Financial Statements15
Financial Decisions Long-term investment decisions
Capital budgeting Long-term financing decisions
Capital structure Working capital management decisions
Net working capital
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Understanding Financial Statements16
Financial Decisions Investing decisions: Types of assets
firm wants to hold. Financing decisions: Acquisition of
funds needed to support long-term investments.
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Understanding Financial Statements17
Generally Accepted Accounting Principles Guidelines based on theory and
practice Evolved over time Procedures, concepts and standards
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Understanding Financial Statements18
GAAP: Key Points Periodicity Going concern Economic entity Monetary unit Full disclosure
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Understanding Financial Statements19
GAAP: Key Points Historical cost Revenue realization Consistency Materiality Industry practices Conservatism
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Understanding Financial Statements20
Cash or Operating Cycle Cash Purchase inventory Produce product Sell product Cash
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Understanding Financial Statements21
Cash or Operating Cycle (cont.) “Cash”
Cash Receivables Debt
Inventory Raw materials Work in progress Finished goods
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Understanding Financial Statements22
Cash or Operating Cycle (cont.) Sell product
Accounts receivable Cash
Cash Collect receivables as cash
Pay off payables Start over