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CORPORATE FINANCIAL REPORTING

CORPORATE FINANCIAL REPORTING. Chapters 2, 3 & 4. What would we look at to decide?. H OW D ID A NDETONY C ORP. D O IN S EPTEMBER?. H OW E ASY W OULD I T B E T O T RICK O UR A CCOUNTANT ?. Redundancy in financial statements Bookkeeping stuff. O THER P OINTS T O D ISCUSS.

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CORPORATE FINANCIAL REPORTING

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  1. CORPORATE FINANCIAL REPORTING Chapters 2, 3 & 4

  2. What would we look at to decide? HOW DID ANDETONYCORP.DO IN SEPTEMBER? Introduction

  3. HOW EASY WOULD IT BE TOTRICK OUR ACCOUNTANT? Introduction

  4. Redundancy in financial statements Bookkeeping stuff OTHER POINTS TO DISCUSS Introduction

  5. THE BALANCE SHEET ASSETS LIABILITIES Current assets Current liabilities Noncurrent assets Non current liabilities (usually are “sub groups”OWNERS’ EQUITY like PP&E, intangibles, etc.)Paid in capital Retained earnings Other comprehensive income The Balance Sheet

  6. Recognition Valuation (measurement) Classification FINANCIAL REPORTING IS ALL ABOUT THREE THINGS: The Balance Sheet

  7. economic resources that will provide the company with future economic benefits. Assets have three characteristics: ASSETS ARE: The Balance Sheet

  8. 1. the future economic benefits are probable and measurable, ASSET CHARACTERISTICS: The Balance Sheet

  9. 1. the future economic benefits are probable and measurable, $ ASSET CHARACTERISTICS: The Balance Sheet

  10. 1. the future economic benefits are probable and measurable, 2. they were obtained orcontrolled by the entity as a result of ASSET CHARACTERISTICS: The Balance Sheet

  11. 1. the future economic benefits are probable and measurable, 2. they were obtained or controlled by the entity as a result of 3. a past transaction. ASSET CHARACTERISTICS: The Balance Sheet

  12. 1. the future economic benefits are probable and measurable, 2. they were obtained or controlled by the entity as a result of economic 3. a past transaction. exchange ASSET CHARACTERISTICS: The Balance Sheet

  13. Originally what the asset cost – after that it gets wild – FASB is moving toward fair value for all assets, but is not there yet. ASSET MEASUREMENT (VALUATION): The Balance Sheet

  14. obligations to give an asset to, or perform a service for, another entity in the future. Liabilities have four characteristics: LIABILITIES ARE: The Balance Sheet

  15. 1. it is a present obligation for which LIABILITY CHARACTERISTICS: The Balance Sheet

  16. 1. it is a present obligation for which 2. the future sacrifice is measurable $ LIABILITY CHARACTERISTICS: The Balance Sheet

  17. 1. it is a present obligation for which 2. the future sacrifice is measurable 3. probable, and LIABILITY CHARACTERISTICS: The Balance Sheet

  18. 1. it is a present obligation for which 2. the future sacrifice is measurable 3. probable, and 4. is the result of a past transaction.(economic exchange) LIABILITY CHARACTERISTICS: The Balance Sheet

  19. Almost always “present value” – in theory, the economic amount the company would have to pay today to satisfy the debt. LIABILITY MEASUREMENT (VALUATION) The Balance Sheet

  20. lawsuit warranties (guarantees) asset retirement obligations (ARO) sick & vacation pay etc. CONTINGUENT LIABILITY The Balance Sheet

  21. CONTINGUENT LIABILITY The Balance Sheet

  22. Whatever. OWNER’S EQUITY The Balance Sheet

  23. A commonly used term meaningowners’ equity. Book value per share - also commonly used (owners’ equity ÷ no. of shares of stock) BOOK VALUE The Balance Sheet

  24. The balance sheet does not always show assets and liabilities well. BALANCE SHEET “FLAW” The Balance Sheet

  25. Our company issues 1,000 shares of stock to investors for $100/share. The price is the fair value of the stock. What would our balance sheet look like? What is our “book value”? What is our book value/share? What is our stock’s market value/share? BALANCE SHEET “FLAW” The Balance Sheet

  26. Our company issues buys 1,000 shares of CROX for $26/share. That price is the fair value of the stock. What would our balance sheet look like? What is our “book value”? What is our book value/share? What is our stock’s market value/share? BALANCE SHEET “FLAW” The Balance Sheet

  27. The CROX stock goes up to $30/share, our accountant puts the gain in an account that increases Owners’ equity. What would our balance sheet look like?What is our “book value”?What is our book value/share?What is our stock’s market value/share? BALANCE SHEET “FLAW” The Balance Sheet

  28. Our company buys a piece of land for $20,000 and signs a 30 year mortgage for the entire amount (CROX stock unchanged). What would our balance sheet look like?What is our “book value”?What is our book value/share?What is our stock’s market value/share? BALANCE SHEET “FLAW” The Balance Sheet

  29. The land goes up in value to $50,000; our accountant ignores the increase in value completely (CROX stock unchanged). What would our balance sheet look like?What is our “book value”?What is our book value/share?What is our stock’s market value/share? BALANCE SHEET “FLAW” The Balance Sheet

  30. Questions? THE BALANCE SHEET The Balance Sheet

  31. MEASURING INCOME Economist’s approach Accountant’s approach (commonly): Cash basisAccrual basis Income & Cash Flow Statements

  32. CASH BASIS: Revenue represents an increase in CASH as a result of providing goods or services to customers. ACCRUAL BASIS: Revenue is an increase in NET ASSETS (assets - liabilities) as a result of providing goods or services to customers. REVENUECASH VS. ACCRUAL Income & Cash Flow Statements

  33. Cash basis: to show revenue on the income statement the company must have received cash from its customer as a result of providing goods or services to the customer. REVENUE CRITERIA FORCASH AND ACCRUAL BASIS Income & Cash Flow Statements

  34. Accrual basis-the SEC says 4 criteria must be met: 1. there is persuasive evidence of an arrangement, 2. delivery has occurred or services have been rendered, 3. the seller’s price is fixed or determinable, & 4. collectability is reasonably assured. REVENUE CRITERIA FORCASH AND ACCRUAL BASIS Income & Cash Flow Statements

  35. We could condense those into two criteria: 1. The company has received a measurable asset from the customer (SEC’s criteria 1, 3 & 4) and 2. The revenue is earned - meaning that the company has done what the customer is paying it to do (SEC’s criterion 2). REVENUE CRITERIA FORCASH AND ACCRUAL BASIS Income & Cash Flow Statements

  36. YOU WORKGET PAID ONAMOUNT October Nov. 1, 2013 6,000November Dec. 1, 2013 12,000December Jan. 2. 2014 12,000 What is revenue in 2013 on the cash basis? on the accrual basis? REVENUECASH VS. ACCRUAL Income & Cash Flow Statements

  37. a decrease in net assets (assets - liabilities) as a result of providing goods or services to customers. USING THE ACCRUAL BASIS AN EXPENSE IS: Income & Cash Flow Statements

  38. Our company engages in the following transactions: QTR1: buys inventory for $6,000 on account & sells 1/3 of the inventory for $7,000 cash QTR2: pays for the inventory purchased in QTR1 & sells the remaining inventory for $15,000 on account QTR3: collects the $15,000 from the QTR2 sale REVENUE AND EXPENSESCASH BASIS VS ACCRUAL Income & Cash Flow Statements

  39. Cash basis Accrual basis Installment sales method Cost recovery Percentage completion Completed contract THERE ARE OTHER METHODS USED TO RECOGNIZE REVENUES / EXPENSES Income & Cash Flow Statements

  40. INCOME STATEMENT FORMAT Point of the income statement –give information about revenue/gains and expenses/and losses for thepast year/quarter and to give that information in a way that helps predict future income. Income & Cash Flow Statements

  41. Continuing operations +/-Discontinued operations ◊ income from operations prior to disposal ◊ gain or loss on disposal +/-Extraordinary itemsevents that are unusual in nature and infrequent in occurrence +/-Cumulative effect of changes in accounting principles = Net income INCOME STATEMENT FORMAT Income & Cash Flow Statements

  42. And every publicly traded company must show earnings per share on its income statement. INCOME STATEMENT FORMAT Income & Cash Flow Statements

  43. Consolidated Statement of Operations Year Ended December 31 (in thousands) 201020092008  Revenues $789,695 $645,767 $721,589  Cost of sales (364,631) (337,720)(486,722)  Gross profit 425,064 308,047 234,867  Selling, general and administrative expense (344,029)(359,231) (423,149)  Income from operations 81,258 ( 51,184) (188,282)  Interest expense ( 657) ( 1,495) ( 1,793)  Other income (expense) - net 414 4,058 565  Income (loss) before income taxes 80,792 ( 48,621) (189,076)  Income tax (expense) benefit (13,066)( 6,543)( 4,434)   Net income $67,726($42,078)($185,076) INCOME STATEMENT FORMATCROX, INC. (simplified) Income & Cash Flow Statements

  44. Consolidated Statement of Operations Year Ended December 31 (in thousands) 201020092008  Revenues $789,695 $645,767 $721,589  Cost of sales (364,631) (337,720)(486,722)  Gross profit 425,064 308,047 234,867  Selling, general and administrative expense (344,029)(359,231) (423,149)  Income from operations 81,258 ( 51,184) (188,282)  Interest expense ( 657) ( 1,495) ( 1,793)  Other income (expense) - net 414 4,058 565  Income (loss) before income taxes 80,792 ( 48,621) (189,076)  Income tax (expense) benefit (13,066)( 6,543)( 4,434)   Net income $67,726($42,078)($185,076) Income (loss) per common share: Basic $ .78 $(0.49) $(2.24) Diluted $ .76 $(0.49) $(2.24) INCOME STATEMENT FORMATCROX, INC. (simplified) Income & Cash Flow Statements

  45. QUESTIONS? INCOME STATEMENT Income & Cash Flow Statements

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