IntroductionSession 1:AgendaThe required materials are:Few quick issuesCourse GradingAccounting IntroductionWhat is Accounting trying to do? Demand for InformationWhy do We Need Financial Accounting?Why do We Need Financial Accounting?Nature of Financial Accounting InformationHow important is this information?Financial Accounting IntroductionWHAT IS OUR COURSE OBJECTIVE?World of a Sophisticated Financial Statement UserWorld of a Sophisticated Financial Statement UserWorld of a Sophisticated Financial Statement UserThree keys to becoming a sophisticated financial statement userFinancial Accounting IntroductionAccounting is complex and interesting because……Financial Accounting IntroductionFinancial Reporting RequirementsFocus: The Annual ReportFinancial Reports:The Auditor's ReportFinancial Reports:The Auditors’ ReportFinancial StatementsFinancial Statements: Balance SheetFinancial Statements: Income StatementDividendsFinancial Statements: Retained Earnings & Shareholders’ EquitySummary1Introduction15.501/516 AccountingSpring 2004Professor Sugata RoychowdhurySloan School of ManagementMassachusetts Institute of TechnologyFeb 4, 20042Session 1:AgendaAdministrative mattersDiscussion of Accounting Why is accounting interesting? Why do we need accounting?Course objective Sophisticated financial statement userAn overview of information in financial statements3The required materials are:5th Edition of Jamie Pratt Financial Accounting In An Economic ContextCase Packet Sloan Space SyllabusScheduleHomework assignmentsTextbook problem solutionsSample exams4Few quick issues Access to MITServer MIT students Non-MIT students First point of contact: TAs Best way to contact me: email Syllabus: Schedule conflict April 26 material5Course GradingWritten Problem Sets 10%Class participation 10Midterm 1 20Midterm 2 20Final 406Accounting IntroductionDiscussion of Accounting Why is accounting interesting? Why do we need accounting?Course objective Sophisticated financial statement userAn overview of financial information7What is Accounting trying to do? Demand for Information Financial Accounting provides information primarily to people outside the company provides information that would be helpful in attracting capital Equity and debt (useful in debt contracts) Credit from suppliers Customers  Employees Managerial Accounting provides information to people inside the company Internal investment decisions Performance evaluation Tax Accounting provides information to the tax authorities8Why do We Need Financial Accounting?CompanyOutsiders- investors- employees- suppliersResourcesTodayResourcesTomorrow9Why do We Need Financial Accounting?CompanyOutsiders- Investors- Suppliers-CreditorsResourcesTodayInformation(e.g., financialstatements)Financial accounting promotes the exchange of resourcesFinancial accounting promotes the exchange of resourcesResourcesTomorrow10Nature of Financial Accounting Information Useful to those making investment and credit decisions, who have a reasonable understanding of business and economic activities. Helpful to present and potential investors  creditors  other users  in assessing the amount, timing, and uncertainty of future cash flows. Provides information about economic resources, the claims to those resources, and the changes in them.11How important is this information?The Reaction of Walmart Stock to Announcement of 3rd Quarter Earnings5454.55555.55656.55757.55858.55959.51-Nov-03 3-Nov-03 5-Nov-03 7-Nov-03 9-Nov-03 11-Nov-03 13-Nov-03 15-Nov-03 17-Nov-03 19-Nov-03 21-Nov-03 23-Nov-03DATESTOCK PRICE12Financial Accounting IntroductionDiscussion of Accounting Why is accounting interesting? Why do we need accounting?Course objective Sophisticated financial statement userAn overview of financial information13WHAT IS OUR COURSE OBJECTIVE? To become intelligent users of accounting information Be comfortable looking through an annual report  Learn the language and techniques Begin to develop the ability to use financial statements to assess a company’s performance  Have a sense of the limitations of financial statement data What are not our objectives to train you to be an accountant or bookkeeper Financial Statement Analysis - take 15.53514World of a Sophisticated Financial Statement UserEvents are occurrences that affect the firm.Examples include:1) Microsoft sued by the Justice Department2) McDonald's sells hamburgers3) United Airlines workers go on strike4) The GAP announces a new marketing strategy forits Old Navy Clothing stores15World of a Sophisticated Financial Statement UserEvents / ActionsRules&ManagementchoicesFinancial Statements16World of a Sophisticated Financial Statement UserRules&ManagementchoiceFinancial StatementsEventsFinancial Accounting = translates events into financial statementsGenerallyAccepted AccountingPrincipals (GAAP)Management selects from alternative rules and from allowable estimates under GAAP17Three keys to becoming a sophisticated financial statement userUnderstand the rules and management’s discretionUnderstand what explains the rules and the type of management discretion IncentivesUnderstand how events affect firm value18Financial Accounting Introduction Discussion of Accounting Why is accounting interesting? Why do we need accounting? Course objective Sophisticated financial statement user An overview of financial information19Accounting is complex and interesting because…… Diversity of businesses and events Many different players Diverse incentives Economic Other Uncertainty Many regulations20Financial Accounting IntroductionDiscussion of Accounting Why is accounting interesting Why do we need accounting? Course objective Sophisticated financial statement userAn overview of financial information21Financial Reporting Requirements Audited Annual Report (10-K) Unaudited Quarterly Reports (10-Q) Current Reports (8-K) within 10 days of the end of a month containing a significant event (e.g., major asset sales, changes in ownership, bankruptcy, changing the auditor) Foreign Companies (20-F)22Focus: The Annual Report The Management Letter Management discussion on developments during the year and current state of the company The