Communicating and Interpreting Accounting Information

Chapter 5

PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin

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

Players in the Accounting Communication Process

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Regulators
Securities and Exchange Commission
Primary Responsibility Protect investors and maintain the integrity of the securities market.

Financial Accounting Standards Board

Primary Responsibility Set Generally Accepted Accounting Standards (GAAP).

Public Company Accounting Oversight Board

Primary Responsibility Sets auditing standards for independent auditors (CPAs) of public companies.

Stock Exchanges
Primary Responsibility Along with state governments, set overall corporate governance standards.

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Managers
Management
Primary Responsibility Responsible for the information in the financial statements and disclosures. Chief Executive Officer (CEO): highest officer of the company Chief Financial Officer (CFO): highest officer associated with the financial and accounting side of the business Accounting Staff: prepare the details of the reports and bear professional responsibility for the accuracy of the information.

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Board of Directors (Audit Committee)

Board of Directors
Primary 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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Auditors
Independent Auditors
Primary Responsibility Follow established auditing standards to assess the fairness of the financial statements and related presentations

An unqualified, or clean, opinion states that the financial statements are fair presentations in all material respects in conformity with GAAP.
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Unqualified Opinion

Information Intermediaries: Financial Analysts and Information Services

Information Intermediaries
Analysis 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 Investors
Includes pension, mutual, endowment and other funds that invest on the behalf of others

Private Investors
Individuals who purchase shares in companies

Lenders or Creditors
Suppliers, 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 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
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Differences in Accounting Methods

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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 (auditors opinion) if the statements are audited.

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Annual Reports
For public companies, annual reports are elaborate due to SEC reporting requirements: 1. Nonfinancial Section
Includes a letter to the stockholders, a description of managements philosophy, products, successes, etc. SEC sets minimum disclosure standards for the financial section for public companies.

2. Financial Section

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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 Accountants 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.

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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.

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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.

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End of Chapter 5

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