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ACC7500 Financial Reporting and Statement Analysis Prof. Bob Halsey 302 Luksic Hall

ACC7500 Financial Reporting and Statement Analysis Prof. Bob Halsey 302 Luksic Hall. Introduction. Course focus on footnotes Most of the action is here Review ACC7000/FIBD notes if you haven’t already Syllabus/Schedule/Resources Text: Wild, Subramanyam and Halsey (WSH), FSA, 8 th ed.

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ACC7500 Financial Reporting and Statement Analysis Prof. Bob Halsey 302 Luksic Hall

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  1. ACC7500 Financial Reporting and Statement AnalysisProf. Bob Halsey302 Luksic Hall

  2. Introduction • Course focus on footnotes • Most of the action is here • Review ACC7000/FIBD notes if you haven’t already • Syllabus/Schedule/Resources • Text: Wild, Subramanyam and Halsey (WSH), FSA, 8th ed. • Blackboard (http://blackboard.babson.edu/ ) • Bring mini-cases to class • Outside help: Wednesday afternoons or by appt., email, phone. • I’m a nice guy and I’m here to help • Questions are ok … really! • Please, let’s share our ideas, but keep focused and not too many tangents

  3. Financial statements Overview Cash Flow Accruals Core earnings Projections Foreign Currency Translation Deferred Taxes Earnings Management Valuation DCF Residual Income ROE Disaggregation review Off Balance Sheet Leasing VIEs Derivatives Pensions Investments Passive Equity method Consolidations Equity transactions Equity carve outs Convertibles Stock Options Course content

  4. Transaction Analysis Grace’s Dress Company

  5. Initial capital contribution of $1,000 into the business; borrow $500 to be repaid $100 per period @ 2% per period. Purchase 10 dresses $500 on account and fixtures, furniture and equipment for $500 in cash (depreciate over 5 periods):

  6. Sell 5 dresses for $600 on account that cost $250; employees earn wages of $100 to be paid next month; record depreciation expense, pay interest on note, repay principal, and pay off account payable:

  7. DuPont Mini-case Review of Financial Statements

  8. Transitory Items Sales - Cost of Goods Sold (COGS) Gross Margin (GM) - General, Sales and Admin. Costs (SGA) - Interest - Taxes Earnings From Continuing Operations ± Discontinued Operations (net of tax) ± Extraordinary Items (net of tax) ± Changes in accounting Principles (net of tax) Net Earnings - Dividends Change in Retained Earnings

  9. Transitory Items • Items below the line (e.g., Cont. Ops.) • Discontinued operations • Extraordinary items (will reduce in the future) • Changes in accounting principles • Transitory items above the line • Gains (losses) on asset sales / debt repurchase (no longer an extraordinary item) • Restructuring expenses (write-downs and accruals)

  10. Discontinued Operations • Separately identifiable business segment being disposed • Disclosure – segregate operating results from continuing operations: • Income (loss) from operations from BOY to measurement date (net of tax) • Gain (loss) on disposal (net of tax) • Operating income from measurement date to disposal date • Gain (loss) from disposal • Recognize losses, defer gains • Adjust income statement retroactively for comparative years • May also segregate assets & cash flows

  11. Effect of Disc Ops on Inc. Stmt.

  12. HP mini-case

  13. HP Mini-case #5

  14. Intangible Assets Asset Measurement mini-case

  15. ACC7500 asset measurement mini-case The use of historical costing is justified on the basis of objectivity and verifiability, which arguably lessen potential bias in financial statements by reducing the degree of subjectivity in the amounts reported. This focus on objectivity often means that information which would otherwise be relevant to financial statement users might be omitted since it is usually more subjective in nature. The book value of stockholder’s equity is reported in conformity with GAAP and often is different from the market value of the company, which is equal to the market price of the firm’s shares multiplied by the numbers of common shares outstanding. Remembering that the characteristic of an asset is the expectation that it will produce future benefits (net cash inflows), identify three “assets” which might be omitted from the balance sheet and, thereby, contribute to the difference between the market value and the book value of the company (i.e., think of “assets” which investors might view as important for the determination of firm value, but which are excluded from the balance sheet because their measurement is too subjective):

  16. Sarbanes-Oxley • Management more accountable - Sarbanes-Oxley assertions: • I have reviewed the report • F/S not materially misleading • F/S fairly represent the financial condition of Co. • Internal controls are sufficient

  17. EY Resigns Over Selectrica Internal Control Deficiencies • Accounts receivable and services revenue incorrectly included a general reserve position in the allowance for doubtful accounts as of December 31, 2004, and incorrectly recorded a receivable as uncollectible as of March 31, 2005, for which payment was subsequently received after March 31 but prior to the completion of the quarterly close process. • Cash equivalents as well as short-term and long-term investments were not classified in the accordance with generally accepted accounting principles during the treasury process for Selectica's India subsidiary. • Selectica failed to reverse deferred revenue when all criteria for revenue recognition had occurred. • The company failed to record the expenses related to the benefits extended when employees were fired. • Deficiencies in its financial statement close process included insufficient controls over the monitoring of the terms of employment agreements and bonus programs and determining the related appropriate accounting treatment. • The company also cited insufficient controls over the monitoring of accrued liabilities recorded upon the sale of the company's E-insurance business to Accenture in December 2003. The company said it had incorrectly not reversed the accrual when the related obligation expired on December 31, 2004. An adjustment as of that date to decrease accrued liabilities and decrease G&A expense was recorded prior to the issuance of the December 31, 2004, financial statements.

  18. Who sets accounting standards? • SEC created by 1933,1935 acts of Congress to regulate securities industry and to establish reporting requirements • SEC has delegated standard setting to private industry: FASB • But, Public Company Accounting Oversight Board (PCAOB) controls FASB’s funds. SEC oversees PCAOB • Bottom line: accounting standard setting is very much a political process. Compromises limit the effectiveness of accounting standards.

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