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What is the role of financial reporting and financial statment analysis?
According to IASB, objctive of general purpose financial reporting is to provide financial information about the reporting entity that is ueseful to existing and potential investors, lenders, and other creditors in making decisinos about the enitty.
Financial statement analysis is to using the information in a company's financial statments, along with other relevant info, to make economic decisions.
Describe roles of key financial statements in evaluating a company's performance? (Statement of financial position/balance sheet, statement of comprehensive eincome, statement of changes in equity, and statement of cash flows)
Balance sheet takes a snap shot of the firms financial position at a given point in time. 3 elements are, Assets, Liabilitileis, and Shareholder Equity.
Statement of comprehensive income reports all changes in equity except for shareholder transactions.
Income statement (statement of operations aor P&L) reports financial performance of the firm over a period of time. include Revneues, expenses, gains and losses.
Under IFRS , income statement can be combined with comprehensive income or presented seperatley. Presentation is similar under US GAAP except firms can choose to report comprehensive income in the statement of shareholders' equity.
Statement of changes in equity reports amount and sources of changes in equity inverstors' investment in the firm over a period of time.
Statement of cash flows reports company's cash receipts and payments. Classified as operatign cash flow, cash effects of transactions that involve normal business of firm. Investing cash flow are those resulting from the aquision sale of property plan and equipment, of a subsidiary segement, or securities of investments in other firms. Financing cash flows result from issueance or retirement of firm's debt and equity security include dividends paid to stockhodlers.
In Management's commentary MD&A management discussion and analysis, what types of things do they talk about?
Firms liquidity, capital aresources, and results of operations.
- -Effects of inflation and changing prices if material
- -Impact of off-balance sheet obligations and contractual obligations such as purchase commitments
- -Accounting policies that require significant judgement by mgmt.
- -Forward-looking expenditures and divestures
Describe obejcte of audits of financial stamtents, the types of audit reports, and the impotance of effectve internal control?
Audit is an independent view of an enitty's financial statements. Public accountatns conduct audits and examine the financial reports and supporting records. Objective is to enable auditor to provide an opinon ofn the fairness and reliablility of financial statements.
- Auditor's opion contains 3 parts:
- 1. The auditor has performed an independent review
- 2. Generally accepted auditing standards were followed, thus providing reasonable assurance that financial statements contain no material error
- 3. Auditor is satisfied that statements were prepared in accordance with accepted accounting principles, and that principles chosen are reasonble.
Unqualified Opinon, indicates auditor beleives financial statements are free of error.
Qualified opinon explain exceptions in audit report.
Adverse opinon if statements are not preseneted fairly or are materially nonconforming with accounting standards.
If auditor is unable to express opinon , a disclaimer of opinino is issued.
what is EDGAR, 8k, 10k, proxy statment, 10 q, Corporat reports and press releases.
EDGAR (electronic data gathering analysis retreival system) which is where Documents stored in SEC
8K reported when acquisition and disposal of major assets or changes in management or coporate governance.
Companies' annaul and quartely financial statments are filed with SEC in 10k and 10 Q respecitvley.
Proxy Statments are issued to shareholder when ther are matters that requirea shareholder vote, such as, election of board members, compensation, management qualifications, and issuance of stock options.
Corporate reports and press releases are viewed as public relation or ssales material. Firms often provide earinngs guidance before financial statments are released.
Financial statment analysis framework?
- 1. State objective and context
- 2.gather data
- 3.process data
- 4.analyze and interpret data
- 5. report conclusions
- 6. update analysis.
Flow of information in accounting system?
- 1. Journal entries record every transaction, showing which accounts are changed and by what amounts. A listing of all jornal entires is called general journal.
- 2.General LEdger sorts entries in journal by account.
- 3. At end of acct period, initial trial balance is prepared shows balances in each account. If adjustjing entries are needed, they will be recordered in adjusted trial balance.
- 4. Account balances from the adjusted trial balance are presented in financial statments.
3 ACCOUNTING EQUATIONS
Assets = Liabs+Contributed capital + End retained earnings
Assets=liabs+ Contributed Capital+ Beg retained earnings+ Revenue-Expenses-Dividends
2 accounting bodies are? Regualtory authorities?
ISAB , FASB. FASB is USA, which sets GAAP.Regulatory authorityies are SEC and FSA Most nations belong to Internatioal Organiztion of Securites Commissions. 3 objectives are 1. protect investors 2 ensure fairness, effieciency, and transparaceny of markets 3. reduce systemic risk.
Types of Forms Filed. S-1, 10-K, 10-Q, DEF-14A, 8-K, Form 144, Form 3,4,5.
S-1 - Filed prior to sale of new securities. Includ audited financial statments, risk assesment, underwriter ID, estimated amount, and use of offerings.
10-K, annual statements. Equivalent SEC forms for foreign issuers in US markets are 40-F for canadain companies, and 20-F for other foreign issuers.
10Q- US Firms quartlery. U.S. Firms Required to file this form quartlery, but do not have to be audited unlike 10K. Non US companies typically requried to fil the equivlanet Form 6-K semi annually.
DEF-14A - When company prepares proxy statemment is must file this form.
8-K - Must disclose material events including significan asset acquisition and sipsosal, changes in mgmt or corporate governance, matters related to accountans, financial statments, or markets in which securities trade.
Form 144 - Can issue securities to certain qualified buyer without registering securities iwth SEC, but must notify SEC that it intends to do so.
FOrm 3,4,and5 involve beneficial ownership of ecurities by company's officer and direcotrs.
IASB Conceptual framework, including objective and qualitivae characteristics, required reporting elements, and constraints and assumptions.
Main tennant is to provide objective financial information that is usefuel in maing decisions about providing resources to an enitty. The resource providders include investors, lenders, and other creditors. Users of financial staments need info about firm's peformance, financial position, and cash flow.
- TWO FUNDAMENTAL characteristics
- 1. Relevance- financial statments are relelvant if information in them can influence users' economic decision. To be relevant, information should have predictiv value, confirmatory value, or both. Materiality is an aspect of relevance.
- 2. Faithful representation - Information that is faithfully rperesentative is complete, neutrals, and free of error.
There are four characterisitcs that enhance relevance and faithful representations: comparabilitiy, verifiablility, timeliness, and understandability.
Required reporting elements are Assets, liabs, equity, income, and expenses.
Constraints, are that the benefit users gain from information shopuld be greater than the cost of presenting it. Another contraint is the fact that non-quanitifable information about a company cannot be caputred directly in financial statements (brand loyalty, reputation, etc.)
Two important underlying assumptions are accrual accounting and going concern.
International Accounting Standard NO.1 defines which financial starements are required and how they must be represented.
The reuired financial stamtents are: Balance Sheet, statement of comprehensive income,cash flow statemtn, statment of changes in owneres' equity, explanatory notes.
- It states the general feature for preparing financial statemetns like: fair presentation, going concern basis, accrual basis, reporting frequency (atleast annually), comparitive information for prior perods should be included.
- Also stated are structure and content of financial statment:
- -Most eneites should present a classified balance sheet showing current and noncurrent assets and liabs.
- -Minimum information is required on the face of each financial statemnt and in the notes.
- -Compartiive information for prior period should be inlcuded unless a specific standard states otherwise.
Differences betwen IFRS and GAAP standards
- -IASB lists income and expenses as elemetns related to perforance, while FASB(GAAP) incudes revenues, expenses, gains, losses, and comprehencsive income.
- -FASB defines an asset as a future economic benefit whereas IASB defines it as a resource from which a future economic benefit is expected to flow. FASB uses word probable in definiton of assets and liabs.
-FASB does not allow uward valuation of most assets.
Firms that do not use GAAP and list their shares in the US, must provide a reconcilliation statemnt tying hteir number to GAAP.
Characteristics of a coherent financial reporting framework.
Barriers of doing so
- Barriers to creating a coherent financial reporting framework include
- -Standard Setting-"principles based, rles based wh ich gives specific guidance, and objectives oriented which blends the two. IFRS is principled based. GAAP is rules based, but conceptual frmaework moving towards objectives- oriented.
- -Measurment - Properly valuing elements on balance sheet and properly valuing changes between points in time on income statement.