Unlocking Financial Statements - Day 1


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Jimmy Gentry presents "Unlocking Financial Statements - Day 2," a business journalism Webinar for the Donald W. Reynolds National Center for Business Journalism.

To learn more about free training for business journalists, please visit businessjournalism.org.

Published in: Business, Economy & Finance
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Unlocking Financial Statements - Day 1

  1. 1. <ul><ul><ul><ul><ul><li>Online Seminar </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Day 1 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>July 18, 2011 </li></ul></ul></ul></ul></ul>Unlocking Financial Statements
  2. 2. <ul><li>An Online Seminar Presented By </li></ul><ul><li>The Donald W. Reynolds National Center </li></ul><ul><li>For Business Journalism </li></ul><ul><li>At Arizona State University </li></ul>Understanding Financial Statements
  3. 3. Presented By <ul><li>James K. Gentry, Ph.D. </li></ul><ul><li>Clyde M. Reed Teaching Professor </li></ul><ul><li>School of Journalism and Mass Communication </li></ul><ul><li>University of Kansas </li></ul><ul><li>[email_address] </li></ul>Understanding Financial Statements
  4. 4. Schedule for Week <ul><li>Day 1: Introduction to financial statements </li></ul><ul><li>Day 2: Income statement </li></ul><ul><li>Day 3: Balance sheet </li></ul><ul><li>Day 4: Cash flows </li></ul><ul><li>Day 5: Beyond the basics </li></ul>Understanding Financial Statements
  5. 5. <ul><li>Introduction </li></ul><ul><li>To Financial Statements </li></ul>Understanding Financial Statements
  6. 6. Types of Companies <ul><li>Public </li></ul><ul><li>Private </li></ul><ul><ul><li>Financial statements conforming to public company statements </li></ul></ul><ul><li>Non-profits </li></ul>Understanding Financial Statements
  7. 7. Important Terms <ul><li>Unaudited </li></ul><ul><li>Audited </li></ul><ul><li>Accountants </li></ul><ul><li>Certified Public Accountants (CPAs) </li></ul><ul><li>GAAP, FASB, AICPA, PCAOB </li></ul>Understanding Financial Statements
  8. 8. Sarbanes-Oxley Act of 2002 <ul><li>Response to abuses with Enron and WorldCom as catalysts </li></ul><ul><li>New responsibilities and resources for SEC </li></ul><ul><li>Created PCAOB </li></ul><ul><li>Major emphasis on “internal controls” </li></ul><ul><li>More disclosure for public companies </li></ul>Understanding Financial Statements
  9. 9. Sarbanes-Oxley Act <ul><li>Analysts must disclose potential conflicts of interest </li></ul><ul><li>Limited types of services accounting firms can provide to public company clients </li></ul><ul><li>CEO, CFO attest to accuracy, completeness, fairness of financial statements </li></ul><ul><li>Rigorous penalties for fraud, other misdeeds </li></ul>Understanding Financial Statements
  10. 10. Public Company Accounting Oversight Board <ul><li>Created by SOX to oversee accounting </li></ul><ul><li>SEC appoints members to five-year terms </li></ul><ul><li>Five full-time members including a chairman </li></ul><ul><li>Two must be or have been CPAs </li></ul><ul><li>All members must be “financially literate” </li></ul><ul><li>Began operating May 2003 </li></ul>Understanding Financial Statements
  11. 11. Key SEC Documents <ul><li>10-K </li></ul><ul><li>10-Q </li></ul><ul><li>8-K </li></ul><ul><li>Proxy statement </li></ul><ul><li>Prospectus </li></ul>Understanding Financial Statements
  12. 12. Annual Report (or 10-K) Strategy <ul><li>Auditor ’s report </li></ul><ul><li>Management ’s discussion and analysis </li></ul>Understanding Financial Statements
  13. 13. Annual Report (or 10-K) Strategy (cont.) <ul><li>Financial statements and footnotes </li></ul><ul><li>Management ’s letter if annual report </li></ul>Understanding Financial Statements
  14. 14. Basic Auditor ’s Report <ul><li>Independent auditor ’s opinion on whether financial statements are presented fairly in all material respects, in accordance with GAAP: </li></ul><ul><li>We looked at these statements </li></ul><ul><li>They ’re management’s responsibility; we’re just here to express our opinion </li></ul><ul><li>We followed the rules in our audits and here ’s what an audit involves </li></ul><ul><li>In our opinion, the statements fairly present the company ’s position </li></ul>Understanding Financial Statements
  15. 15. Understanding Financial Statements
  16. 16. Auditor ’s Report by Category <ul><li>Clean or Unqualified </li></ul><ul><li>Qualified </li></ul><ul><li>Disclaimer </li></ul><ul><li>Adverse </li></ul>Understanding Financial Statements
  17. 17. New Auditor ’s Report <ul><li>Combines traditional report with internal controls requirement of Sarbanes-Oxley Act </li></ul>Understanding Financial Statements
  18. 18. MD&A <ul><li>Must read it </li></ul><ul><li>Often a source of good information and insights </li></ul><ul><li>Densely written </li></ul><ul><li>SEC says it wants greater transparency </li></ul>Understanding Financial Statements
  19. 19. Goal of Accounting <ul><li>Record, classify and report financial transactions. To provide managers across the organization with information that facilitates: </li></ul><ul><ul><li>Control of activities and expenditure </li></ul></ul><ul><ul><li>Refinement of operational plans </li></ul></ul><ul><ul><li>Accountability </li></ul></ul><ul><ul><li>Reporting on project outcomes </li></ul></ul><ul><ul><li>Writing of bids for new funds </li></ul></ul>Understanding Financial Statements
  20. 20. Goal of Finance <ul><li>Maximize shareholder wealth as reflected in market price of the stock </li></ul><ul><li>Achieving this goal requires financial manager to focus on economic profit, not accounting profit </li></ul>Understanding Financial Statements
  21. 21. Financial Decisions <ul><li>Long-term investment decisions </li></ul><ul><ul><li>Capital budgeting </li></ul></ul><ul><li>Long-term financing decisions </li></ul><ul><ul><li>Capital structure </li></ul></ul><ul><li>Working capital management decisions </li></ul><ul><ul><li>Net working capital </li></ul></ul>Understanding Financial Statements
  22. 22. Financial Decisions <ul><li>Investing decisions: Types of assets firm wants to hold. </li></ul><ul><li>Financing decisions: Acquisition of funds needed to support long-term investments. </li></ul>Understanding Financial Statements
  23. 23. Generally Accepted Accounting Principles <ul><li>Guidelines based on theory and practice </li></ul><ul><li>Evolved over time </li></ul><ul><li>Procedures, concepts and standards </li></ul>Understanding Financial Statements
  24. 24. GAAP: Key Points <ul><li>Periodicity </li></ul><ul><li>Going concern </li></ul><ul><li>Economic entity </li></ul><ul><li>Monetary unit </li></ul><ul><li>Full disclosure </li></ul>Understanding Financial Statements
  25. 25. GAAP: Key Points <ul><li>Historical cost </li></ul><ul><li>Revenue realization </li></ul><ul><li>Consistency </li></ul><ul><li>Materiality </li></ul><ul><li>Industry practices </li></ul><ul><li>Conservatism </li></ul>Understanding Financial Statements
  26. 26. Cash or Operating Cycle <ul><li>Cash </li></ul><ul><li>Purchase inventory </li></ul><ul><li>Produce product </li></ul><ul><li>Sell product </li></ul><ul><li>Cash </li></ul>Understanding Financial Statements
  27. 27. Cash or Operating Cycle (cont.) <ul><li>“ Cash” </li></ul><ul><ul><li>Cash </li></ul></ul><ul><ul><li>Receivables </li></ul></ul><ul><ul><li>Debt </li></ul></ul><ul><li>Inventory </li></ul><ul><ul><li>Raw materials </li></ul></ul><ul><ul><li>Work in progress </li></ul></ul><ul><ul><li>Finished goods </li></ul></ul>Understanding Financial Statements
  28. 28. Cash or Operating Cycle (cont.) <ul><li>Sell product </li></ul><ul><ul><li>Accounts receivable </li></ul></ul><ul><ul><li>Cash </li></ul></ul><ul><li>Cash </li></ul><ul><ul><li>Collect receivables as cash </li></ul></ul><ul><li>Pay off payables </li></ul><ul><li>Start over </li></ul>Understanding Financial Statements