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Slide_Chapter 2.pdf INTRODUCE TO FINANCIAL STATEMENT
- 1. Introduction to Financial Statementsand Other Financial Reporting Topics Chapter 2 © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 2. Chapter 2, Slide#2 Sole Proprietorship Partnership Corporation Number of owners 1 2 or more (partners) Numerous (shareholders) Legally separate from owners No No Yes Owners liable for business debts Yes Yes No Profits taxable To the owner To the owners To the corporation as earnings; to the owners when dividends are received Modified form “LLC” limits liability of owner; may increase income tax exposure “Subchapter S” profits are taxed at ownership level only Forms of Business Entities © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 3. Chapter 2, Slide#3 • Income statement • Statement of stockholders’ equity • Balance sheet • Statement of cash flows • Support for the financial statements is provided by notes The Financial Statements © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 4. Chapter 2, Slide#4 • Dated for a specific period • Summarizes revenues and expenses • Reports net income – Excess of revenues over expense • Net income increases retained earnings Income Statement For the Year Ended Dec. 31, 2011 Revenue $ 120,000 Expenses (100,000) Net Income $ 20,000 Income Statement © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 5. Chapter 2, Slide#5 Income Statement For Year Ending December 31, 2011 Revenue $ 120,000 Expenses (100,000) Net Income $ 20,000 Statement of Stockholders’ Equity For Year Ending December 31, 2011 Capt. Stk. Ret. Earn. Beginning Balance $40,000 $ 25,000 Issue stock 10,000 Net income 20,000 Dividends (10,000) Ending Balance $50,000 $ 35,000 • Dated for a specific period • Reconciles beginning and ending balances of the stockholders’ equity accounts – Capital Stock – Retained Earnings – Etc. • Links the income statement and the balance sheet Statement of Stockholders’ Equity © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 6. Chapter 2, Slide#6 Shows the financial condition of an entity as of a particular date – Assets: the resources of the business – Liabilities: the debts of the business – Equity: the owners’ interest in the business The Accounting Equation: Assets = Liabilities + Stockholders’ Equity Assets = Liabilities + Capital Stock + Retained Earnings Balance Sheet Assets $110,000 Liabilities 25,000 Stockholders’ Equity Capital Stock 50,000 Retained Earnings 35,000 Tot Liab. & Equity $110,000 Income Statement Revenue $ 120,000 Expenses (100,000) Net Income $ 20,000 Statement of Stockholders’ Equity Capt. Stk. Ret. Earn. Beginning Balance $40,000 $ 25,000 Issue stock 10,000 Net income 20,000 Dividends (10,000) Ending Balance $50,000 $ 35,000 Statement of Stockholders’ Equity © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 7. Chapter 2, Slide#7 • Covers the same period as the income statement • Three sections – Cash flows from operating activities – Cash flows from investing activities – Cash flows from financing activities Statement of Cash Flows © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 8. Chapter 2, Slide#8 • An integral part of the financial statements • Required presentation – Summary of significant accounting policies – Contingent liabilities – Subsequent events relating to conditions that existed at the balance sheet date • Disclose and adjustment of the financial statements – Subsequent events relating to conditions that did not exist at the balance sheet date • Disclosure but no adjustment of the financial statements Notes © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 9. Chapter 2, Slide#9 1. Recording transactions 2. Recording adjusting entries 3. Preparing the financial statement The Accounting Cycle © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 10. Chapter 2, Slide#10 • Internal or external event that causes a change in a company’s assets, liabilities, or stockholders’ equity • Recorded in a journal (journal entry) • Posted to general ledger accounts • Double-entry system ✓ Debit: left side of an account ✓ Credit: right side of an account ✓ Debits = Credits Account Title Debit Credit Recording Transactions © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 11. Chapter 2, Slide#11 Permanent Temporary Account types Assets Liabilities Equity Revenues, Gains Expenses, Losses Dividends Balances Carry forward to the next fiscal period Closed to retained earnings at year-end Represent the accounting equation Accounting System Components © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 12. Chapter 2, Slide#12 • Required by the accrual basis of accounting • Prepared at the end of the fiscal period • Records (recognizes) for the current period – Expenses incurred – Revenues earned • Recorded in the general journal • Posted to the general ledger Accounting System Components © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 13. Chapter 2, Slide#13 • The output of the accounting system • Based on the adjusted general ledger account balances • Directly from the general ledger – Income statement – Balance sheet • From analysis of general ledger accounts – Statement of cash flows Preparing the Financial Statements © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 14. Chapter 2, Slide#14 • Voluntary private sector organization (Treadway) • Committee of Sponsoring Organizations (COSO) – Internal control reports – Standard framework for evaluating internal control • Need for internal control emphasized by – Sarbanes-Oxley Act §404 – Management's Report on Internal Control – Independent auditor’s opinion on management’s assessment of internal control Treadway Commission © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 15. Chapter 2, Slide#15 • Audit is conducted by CPAs • The audit report is the formal statement of audit opinion – Unqualified opinion – Qualified opinion – Adverse opinion – Disclaimer of opinion Auditor’s Opinion © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 16. Chapter 2, Slide#16 • The financial statements present fairly – The financial position – Results of operations – Cash flows • In conformity with generally accepted accounting principles • For the user: the highest degree of reliability Unqualified Opinion © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 17. Chapter 2, Slide#17 • Except for the matter to which the exception relates • The financial statements present fairly – The financial position – Results of operations – Cash flows • In conformity with generally accepted accounting principles • For the user: determine the significance of the exception Qualified Opinion © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 18. Chapter 2, Slide#18 • The financial statements do not present fairly – The financial position – Results of operations – Cash flows • In conformity with generally accepted accounting principles • For the user: reliability of financial statements need to be seriously questioned Adverse Opinion © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 19. Chapter 2, Slide#19 • The auditor does not express an opinion • Auditor – Has not preformed an audit sufficient in scope to form an opinion or – Is not independent • For the user: auditor’s statement conveys no indication of financial statement reliability Disclaimer of Opinion © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 20. Chapter 2, Slide#20 • Paragraph #1: – Financial statements have been audited – Financial statements are responsibility of management – Auditors have responsibility to express or disclaim an opinion Unqualified Auditor’s Report © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 21. Chapter 2, Slide#21 • Paragraph #2 – Audit conducted in accordance with the standards of the (U.S.) Public Accounting Oversight Board – Auditor is required to plan and perform the audit • Obtain reasonable assurance • Financial statements are free from material misstatement – Audit provides a reasonable basis for opinion • Examining evidence • Assessing accounting principles and estimates Unqualified Auditor’s Report (cont’d) © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 22. Chapter 2, Slide#22 • Paragraph #3 – Opinion: in conformity with generally accepted (U.S.) accounting principles • Also: for public companies, reference to the audit of internal control effectiveness – In accordance with the (U.S.) Public Accounting Oversight Board – Based on criteria established by COSO Unqualified Auditor’s Report (cont’d) © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 23. Chapter 2, Slide#23 • Required by Sarbanes-Oxley • May be combined with audit opinion report • Paragraphs 1. Scope 2. Responsibility and procedures 3. Opinion 4. Reference to financial statement audit Auditor’s Report on Internal Control © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 24. Chapter 2, Slide#24 • Review – Less in scope than an audit – An opinion is not expressed – Provides negative assurance • “Not aware of any material misstatements or required modifications” • Compilation – Presents only financial information provided by management – No opinion or any other assurance is given Other Types of Engagements © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 25. Chapter 2, Slide#25 • Management is responsible for – The preparation of the financial statements – The integrity of the financial statements • Management’s Statement of Responsibility – May be included in the annual report Management’s Responsibility © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 26. Chapter 2, Slide#26 Required filings – 10-K: annual filing (audited) • Includes financial statements plus – Information on the business entity – Market information – Management discussion and analysis – Directors, executive officers, and their compensation – Related party transactions – 10-Q: quarterly filing (unaudited) – 8-K: “current report” • To report the occurrence of any material events or corporate changes The SEC’s Integrated Disclosure System © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 27. Chapter 2, Slide#27 • Proxy – Notice and authorization of shareholder voting rights on corporate actions – Content and form governed by the SEC • Summary Annual Report – Highly condensed financial information – Must be accompanied by a proxy containing full financial information – Not adequate for financial analysis Additional Reporting Venues © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 28. Chapter 2, Slide#28 • Capital markets generate security prices that reflect worth • Publicly available information is reflected in share prices • Investors will be harmed if full disclosure is not made • Method of disclosure does not impact value – Body of the financial statements – Notes to the financial statements • Benefit of making disclosure outweighs the cost The Efficient Market Hypothesis © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 29. Chapter 2, Slide#29 Caring Honesty Accountability Promise keeping Pursuit of excellence Loyalty Fairness Integrity Respect for others Responsible citizenship Essential values in interpersonal relationships Ethics © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 30. Chapter 2, Slide#30 1. Determine the facts 2. Define the ethical issues 3. Identify major principles, rules, and values 4. Specify the alternatives 5. Compare norms, principles, and values with alternatives 6. Assess the consequences 7. Make your decision AAA Ethical Decision Framework © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 31. Chapter 2, Slide#31 • Enacted under Sarbanes-Oxley Act • Applicable to chief financial officers • Disclosure requirements – Whether a code of ethics has been adopted – If not, why not – Code is published in the annual report or on the firm’s web site SEC Requirement: A Code of Ethics © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 32. Chapter 2, Slide#32 • Accounting standards can vary by country – Development is often in response to domestic needs • International accounting standards set by – IASC (1973 – 2000) – IASB (2001 to present) has no enforcement power • In the U.S. – SEC requires registrants to report in U.S. GAAP – FASB is participating in the harmonization project Harmonization of International Accounting Standards © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 33. Chapter 2, Slide#33 Harmonization of International Accounting Standards • IASB issues (IFRS) International Financial Reporting Standards. • 2002 Norwalk agreement – FASB and IASB commit to high-quality, compatible accounting standards. • 2007 agreement between US and European Union to allow companies to drop US GAAP if financials were prepared by IFRS. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 34. Chapter 2, Slide#34 • Parent consolidates with subsidiary – Report results of operations separately – Sum subsidiary and parent results of operations • Legal control vs. effective control • Consolidation occurs when parent has effective control over the subsidiary – Holds a majority of risks, rewards, and decision- making ability Consolidated Financial Statements © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 35. Chapter 2, Slide#35 • Effected through merger or acquisition • Purchase method of accounting • Record assets and liabilities acquired at their fair values • Excess of purchase price over fair value of net assets acquired is reported as goodwill Accounting for Business Combinations © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.