Accounting & Financial Reporting

1. Accounting & Financial Reporting BUSG 503Michael Dimond

2. Financial Accounting for MBAs • Let’s review • Exam #1 • NOPM = NOPAT/Sales • NOPAT = EBIT adjusted for tax effect

3. Operating Income & Analysis • Revenue Recognition • Research & Development • Restructuring • Tax • EPS: Earnings Per Share • Other Issues • Foreign Currency Translation • Extraordinary Items

6. Revenue Recognition • Gross versus net revenues • Sales on consignment • Percentage of Completion • Channel stuffing • Barter transactions • Mischaracterizing transactions as arm’s-length • Pending execution of sales agreements • Failure to take delivery • Nonrefundable fees

7. Research & Development • What is R& D as a percent of sales? • What uses will R&D serve? • Why is it expensed instead of capitalized? • How effective is their R&D effort? • How does R&D as a percent of sales compare to peer companies?

8. Restructuring • Components: • Employee severance or relocation costs • Asset write-downs • Other (i.e., contract termination costs, legal expenses, etc.) • A company is required to have a formal restructuring plan • Approved by its board of directors before any restructuring charges are accrued. • Identify the relevant employees and notify them of its plan. • In subsequent years, the company must disclose in its footnotes • the original amount of the liability (accrual) • how much of that liability is settled in the current period (such as employee payments) • how much of the original liability has been reversed because of cost overestimation, any new accruals for unforeseen costs, and the current balance of the liability.

9. Restructuring

10. Tax • Companies maintain two sets of accounting records, • one for preparing financial statements for external constituents, including current and prospective shareholders, and • another for reporting to tax authorities. • Two sets of accounting records are necessary because the U.S. tax code is different from GAAP. • The difference creates an item on the balance sheet • Deferred tax liabilities arise when the net book value of liabilities is less for financial reporting than for tax reporting, or when the net book value of assets is greater for financial reporting than for tax reporting. • Deferred tax assets arise when the net book value of liabilities is greater for financial reporting than for tax reporting, or when the net book value of assets is smaller for financial reporting than for tax reporting. • When a company reports a loss for tax purposes, it can carry back that loss for up to two years to recoup previous taxes paid. Any unused losses can be carried forward for up to twenty years to reduce future taxes.

11. Tax

12. EPS: Earnings Per Share

13. Foreign Currency Translation

14. Extraordinary Items • Two categories of items are presented “below-the-line”: • Discontinued operations Net income (loss) from business segments that have been or will be sold, and any gains (losses) on net assets related to those segments sold in the current period. • Extraordinary items Gains or losses from events that are both unusual and infrequent. • The following items are generally not reported as extraordinary items: • Gains and losses on retirement of debt • Write-down or write-off of operating or nonoperating assets • Foreign currency gains and losses • Gains and losses from disposal of specific assets or business segment • Effects of a strike • Accrual adjustments related to long-term contracts • Costs of a takeover defense

15. For next week… • Exercises E5-22, 23, 24, 27, 28, 31. We will go through these in class • Read Chapter 6 & preview the Mini Exercises