Chapter 5 Communicating and interpreting accounting information Players in the Accounting Communication Process Corporate governance procedures designed to ensure that the company is managed in the interests of the shareholders Sarbanes Oxley Act law which strengthen US financial reporting and corporate governance regulations Regulators SEC FASB PCAOB Stock Exchanges Securities and Exchange Commission SEC companies must provide to stockholders and then measurement rules in producing them Financial Accounting Standards Board FASB GAAP Public Company Accounting Oversight Board PCAOB public companies private sector that sets Generally Accepted Accounting Principles US gov agency tat determines the financial statements that Sets auditing standards for independent auditors CPAs of Managers CEO CFO and Accounting Staff Chief Executive Officer CEO Chief Financial Officer CFO prepare details of reports Accounting Staff Board of Directors Board of Directors Audit Committee Independent Auditors related presentations Issue an unqualified or clean opinion states that the financial statements are fair presentations in all material respects in conformity with GAAP elected by the stockholders to represent their interests responsible for maintaining the integrity of the company s financial reports Follow established auditing standards to assess the fairness of the financial statements and responsible for providing accurate financial reports Users Institution and private investors creditors and others managers of pension mutual endowment and other funds that invest on behalf of others Institutional investors Private investors cost material amounts amounts large enough to influence a user s decision individuals who purchase shares in companies venture capitalists effectiveness requires benefits for accounting and reporting info to outweigh the cost Information Intermediaries 1 Most investors rely on company websites information services and financial analysts to gather and analyze information 2 Companies actually file their SEC forms electronically through the EDGAR Electronic Data Gathering and Retrieval Service which is sponsored by the SEC 3 Financial analysts Make earning forecasts to assist investment decisions The Disclosure Process SEC Regulation Fair Disclosure FD access to all important company news Managers and other insiders are also prohibited from insider trading trading their company s shares based on nonpublic insider information so that no party benefits from early access requires that companies provide all investors equal Press Releases A press release is a written public news announcement normally distributed to major news services conference call unexpected earnings senior managers answer analyst s questions about quarterly results difference between expected earning and actual earnings Annual reports form 10 K annual reports simple documents photocopied on white bond paper include 1 4 basic financial statements income statements balance sheet statement of Stockholders Equity cash flow statement related notes footnotes 2 3 Report of independent accountants auditor s opinion if statements are audited form 10 K annual report that publicly traded companies must file w SEC item 1 business description of business operations and company s strategy item 6 selected financial data summarized financial data for a 5 year period item 7 management s discussion and analysis of financial condition and results of operation Quarterly reports and for 10 Q unaudited form 10 Q quarterly report that publicly traded companies must file with SEC form 8 l used by publicly traded companies to disclose any material event not previous reported that is important to investor auditor changes mergers Classified balance sheet present for 2 years allows for comparison over time intangible assets reported net of accumulate amortization deferred revenues show up in 2 places current liabilities noncurrent liabilities Classified income statement gross profit gross margin net sales less cost of goods sold o income statement provide same info regardless if co reports a gross profit subtotal operating income income from operations net sales less cost of goods sold other operating expense non operating other items revenues expenses gains and losses that do not relate to company s primary operations income before income taxes pre tax earnings revenue all expenses except tax expense noncurring items reported separately on income statement because they are not useful in predicting the future income of a corporation o o discontinued operation extraordinary items ROA Profit Drive Analysis and Business Strategy ROA decomposition DuPoint analysis profit drives profit levers describe ways management can improve ROA Net profit margin net income net sales measures how much of every sales dollar is profit It can be increased by increasing sales volumes increasing sales price decreasing cost of goods sold and operating expenses Total asset turnover Net sales average total assets measures how many sales dollar generated w each dollar of assets efficiency of use of assets Can be increased by centralizing distribution to reduce inventory kept on hand consolidating production facilities in fewer factories to reduce the amount of assets necessary to generate each dollar of sales ROA Net profit margin total asset turnover Net income average total assets net income net sales x net sales average total assets High value product differentiation strategy company s charge higher prices and earn higher net profit margin Low cost strategy relies on efficient management of accounts receivable inventory and productive assets to produce a higher total asset turnover
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