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Chapter 5

Chapter 5. Financial Reporting and Analysis. PowerPoint Authors: Brandy Mackintosh Lindsay Heiser. Learning Objective 5-1. Explain the needs of financial statement users. The Needs of Financial Statement Users. Learning Objective 5-2.

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Chapter 5

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  1. Chapter 5 Financial Reporting and Analysis PowerPoint Authors: Brandy Mackintosh Lindsay Heiser

  2. Learning Objective 5-1 Explain the needs of financial statement users.

  3. The Needs of Financial Statement Users

  4. Learning Objective 5-2 Describe the environment for financial reporting, including the Sarbanes-Oxley Act.

  5. Accounting Fraud

  6. Possible Incentives to Commit Fraud

  7. Opportunity to Commit Fraud Internal controls are the methods that a company uses to protect against theft of assets, to enhance the reliability of accounting information, to promote efficient and effective operations, and to ensure compliance with laws and regulations.

  8. Character to Rationalize and Conceal Fraud Most fraudsters have a sense of personal entitlement, which outweighs other moral principles, such as fairness, honesty, and concern for others.

  9. The Sarbanes-Oxley (SOX) Act

  10. Learning Objective 5-3 Prepare a comparative balance sheet, multistep income statement, and statement of stockholders’ equity.

  11. Final Release of Annual Report Preliminary Release of Key Results Fiscal Year End Finalize External Audit Finalize Financial Statements End of February, 2014 December 31, 2013 Middle of February, 2014 Financial Reporting in the U.S. Enhance financial statement format Obtain independent external audit Release additional financial information

  12. Comparative Financial Statements ACTIVISION BLIZZARD, INC. Balance Sheet (in millions of U.S. dollars) A comparative format reveals changes over time. December 31, 2010 $ 2,812 696 640 112 1,125 5,385 169 720 7,132 $13,406 $ 363 1,726 818 2,907 296 3,203 10,146 57 10,203 $13,406 December 31, 2009 $ 2,768 477 739 241 1,104 5,329 138 1,121 7,154 $13,742 $ 302 1,426 779 2,507 479 2,986 11,117 (361) 10,756 $13,742 Assets Current Assets Cash Short-term Investments Accounts Receivable Inventories Other Current Assets Total Current Assets Property and Equipment, net Other Noncurrent Assets Goodwill Total Assets Liabilities and Stockholders’ Equity Current Liabilities: Accounts Payable Unearned Revenue Accrued and Other Liabilities Total Current Liabilities Other Noncurrent Liabilities Total Liabilities Stockholders’ Equity Contributed Capital Retained Earnings (Accumulated Deficit) Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity

  13. Multistep Income Statements ACTIVISION BLIZZARD, INC. Income Statement (in millions of U.S. dollars) Year Ended December 31, 2008 $ 3,026 1,839 592 464 364 3,259 (233) 46 (187) (80) $ (107) Sales and Service Revenues Expenses: Production Research and Development Marketing and Sales General and Administrative Total Operating Expenses Income (Loss) from Operations Revenue from Investments Income (Loss) before Income Tax Income Tax Expense (Recovery) Net Income (Loss) 2010 $ 4,447 2,126 642 520 690 3,978 469 23 492 74 $ 418 2009 $ 4,279 2,307 627 544 827 4,305 (26) 18 (8) (121) $ 113

  14. Statement of Stockholders’ Equity ACTIVISION BLIZZARD, INC. Statement of Stockholders’ Equity For the Year Ended December 31, 2010 (in millions of U.S. dollars) Contributed Capital $ 11,117 73 (1,044) $ 10,146 Balances at December 31, 2009 Net Income Dividends Declared Issued Shares of Stock Repurchased Shares of Stock Balances at December 31, 2010 Retained Earnings (Deficit) $ (361) 418 (0) $ 57

  15. Learning Objective 5-4 Describe other significant aspects of the financial reporting process, including external audits and the distribution of financial information.

  16. Independent External Audit Auditors are Certified Public Accountants who are independent of the company. Unqualified Audit Opinion Qualified Audit Opinion Financial statements are presented in accordance with GAAP Financial statements fail to follow GAAP or not able to complete needed tests

  17. Preliminary Releases Most public companies announce quarterly and annual earnings through a press release that is sent to news agencies.

  18. Financial Statement Release

  19. Securities and Exchange Commission (SEC) Filings Public companies are required to electronically file certain reports with the SEC, including Form 10-K, Form 10-Q, and Form 8-K.

  20. Learning Objective 5-5 Explain the reasons for, and financial statement presentation effects of, adopting IFRS.

  21. Globalization and IFRS International Financial Reporting Standards (IFRS) are accounting rules established by the International Accounting Standards Board for use in over 100 countries around the world. In 2008, the SEC announced a plan to allow some U.S. companies to use IFRS in 2009. In 2012, the SEC is still weighing their options as to whether or not they will require mandatory use of IFRS and when.

  22. IFRS Formatting of Financial Statements

  23. A side-by-side comparison of a balance sheet prepared using GAAP and a statement of financial position prepared using IFRS.

  24. Learning Objective 5-6 Compare results to common benchmarks.

  25. Comparison to Common Benchmarks To help interpret amounts on the financial statements, it’s useful to have points of comparison or “benchmarks.” Competitors Prior Periods Time series analysis compares a company’s results for one period to its own results over a series of time periods. Cross-sectional analysis compares the results of one company with those of others in the same section of the industry.

  26. Time Series Analysis Chart

  27. Cross-Sectional Analysis

  28. Learning Objective 5-7 Calculate and interpret the debt-to-assets, asset turnover, and net profit margin ratios.

  29. A Basic Business Model • Most businesses can be broken down into 4 elements: • Obtain financing from lenders and investors, which is used to invest in assets, • Invest in assets, which are used to generate revenues, • Generate revenues, which produce net income, • Produce net income, which is needed to satisfy lenders and investors. (2) Assets (3) Revenues generate produce Invested in Investing Operating (1) Debt & Equity Financing (4) Net Income Financing

  30. Financial Statement Ratios In addition to making it possible to compare companies of different sizes, a benefit of ratio analysis is that it enables comparisons between companies reporting in different currencies (dollars vs. euros).

  31. Financial Statement Ratios The debt-to-assets ratio provides the percentage of assets financed by debt. A higher ratio means greater financial risk.

  32. Financial Statement Ratios The asset turnover ratio measures how well assets are used to generate sales. A higher ratio means greater efficiency.

  33. Financial Statement Ratios The net profit margin ratio measures the ability to generate sales while controlling expenses. A higher ratio means better performance.

  34. How Transactions Affect Ratios Three-step process: Analyze the transaction to determine its effects on the accounting equation. Relate the effects in step 1 to the ratio’s components, to determine whether each component increases, decreases, or stays the same. Evaluate the combined impact of the effects in step 2 on the overall ratio.

  35. Chapter 5Solved Exercises M5-4, M5-5, M5-9, M5-10, E5-8, E5-11

  36. M5-4 Preparing and Interpreting a Multistep Income Statement Nutboy Theater Company reported the following single-step income statement. Prepare a multistep income statement that distinguishes the financial results of the local theater company’s core and peripheral activities. Also, calculate the net profit margin using the company’s core revenues and compare it to the 8 percent earned in 2012. In which year did the company generate more profit from each dollar of sales?

  37. M5-4 Preparing and Interpreting a Multistep Income Statement NUTBOY THEATER COMPANY Income Statement For the year ended December 31, 2013 Revenues Ticket Sales Concession Sales Total Sales Revenues Operating Expenses: Salaries and Wage Expense Advertising Expense Utilities Expense Total Operating Expenses Income from Operations Other Revenue (Expense): Interest Revenue Other Revenue Income before Income Tax Expense Income Tax Expense Net Income $ 50,000 2,500 52,500 30,000 8,000 7,000 45,000 7,500 200 50 7,750 2,500 $ 5,250 Net Profit Margin = Net Income/Total Sales Revenues = $5,250 / $52,500 = 10%

  38. M5-5 Preparing a Statement of Stockholders’ Equity On December 31, 2011, WER Productions reported $100,000 of contributed capital and $20,000 of retained earnings. During 2012, the company had the following transactions. Prepare a statement of stockholders’ equity for the year ended December 31, 2012. Issued stock for $50,000. Declared and paid a cash dividend of $5,000. Reported total revenue of $120,000 and total expenses of $87,000.

  39. M5-5 Preparing a Statement of Stockholders’ Equity WER PRODUCTIONS Statement of Stockholders’ Equity For the Year Ended December 31, 2012 Stockholders' Equity $120,000 33,000 (5,000) 50,000 $198,000 Balances at December 31, 2011 Net Income Dividends Declared Issued Shares of Stock Balances at December 31, 2012 Retained Earnings $ 20,000 33,000 (5,000) $ 48,000 Contributed Capital $100,000 50,000 $150,000

  40. M5-9 Determining the Effects of Transactions on Debt-to-Assets, Asset Turnover, and Net Profit Margin Using the transactions in M5-8, complete the following table by indicating the sign of the effect (+ for increase, - for decrease, NE for no effect, and CD for cannot determine) of each transaction. Consider each item independently. Transaction Debt-to-Assets Asset Turnover Net Profit Margin Issued 10,000 shares of stock for $90,000 cash. a. - - NE b. Equipment costing $4,000 was purchased by issuing a note payable. + - NE c. Recorded depreciation of $1,000 on the equipment. + + -

  41. M5-10 Preparing Comparative Financial Statements Complete the blanks in the following comparative income statements, statement of stockholders’ equity, and balance sheets. • Income from Operations • Income before Income Tax Expense • 100

  42. M5-10 Preparing Comparative Financial Statements 480 80 (from December 31, 2012, Balance Sheet) 120

  43. M5-10 Preparing Comparative Financial Statements 480 180

  44. End of Chapter 5

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