Notesale: Turn your study into money

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Introduction
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g
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Helpful to
ƒ present and potential investors
ƒ creditors
ƒ other users
ƒ in assessing the amount, timing, and uncertainty of future cash
flows
...

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How important is this information?
The Reaction of Wal-Mart Stock to Announcement of 3rd Quarter Earnings
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5
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STOCK PRICE

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1-Nov-03

3-Nov-03

5-Nov-03

7-Nov-03

9-Nov-03

11-Nov-03

13-Nov-03
DATE

15-Nov-03

17-Nov-03

19-Nov-03

21-Nov-03

23-Nov-03

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Financial Accounting
Introduction

ƒDiscussion of Accounting
ƒ Why is accounting interesting?
ƒ Why do we need accounting?

ƒCourse objective

ƒ Sophisticated financial
statement user

ƒAn overview of financial
information

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WHAT IS OUR COURSE
OBJECTIVE?
ƒ To become intelligent users of accounting
information
...
535
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World of a Sophisticated
Financial Statement User
Events are occurrences that affect the firm
...
Outside investors demand
independently audited financial information
In the process, accounting misses out on forwardlooking information that might be valuable, but lacks
objective evidence (e
...
, research in progress)

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Understanding the genesis of
the rules

ƒ Asymmetry

ƒ Asymmetric treatment of good and bad news
ƒ Faced with uncertain bad news, accounting
ƒ
ƒ

tends to enter it into the records
Faced with uncertain good news, tendency to
ignore it
Why?
ƒ Demand for bad news
ƒ Creditors with no upside, but all the downside
ƒ Investors believe bad news disclosed by

management, but skeptical of good news unless
supported by objective evidence
ƒ Management incentives affect believability of their
disclosures

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Financial Accounting
Introduction

ƒ Discussion of Accounting
ƒ Why is accounting interesting?
ƒ Why do we need accounting?

ƒ Course objective

ƒ Sophisticated financial statement user

ƒ An overview of financial information

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Accounting is complex and
interesting because……
ƒ Diversity of businesses and events
ƒ Many different players
ƒ Diverse incentives
ƒ Economic
ƒ Other
ƒ Uncertainty
ƒ Many regulations

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Financial Accounting
Introduction

ƒDiscussion of Accounting

ƒ Why is accounting interesting
ƒ Why do we need accounting?

ƒCourse objective

ƒ Sophisticated financial statement
user

ƒAn overview of financial

information

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Financial Reporting
Requirements
ƒ Audited Annual Report (10-K)
ƒ Unaudited Quarterly Reports (10-Q)
ƒ Current Reports (8-K)

ƒ within 10 days of the end of a month

containing a significant event (e
...
,
major asset sales, changes in
ownership, bankruptcy, changing the
auditor)

ƒ Foreign Companies (20-F)

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Focus: The Annual Report
ƒ The Management Letter
ƒ Management discussion on developments during the
year and current state of the company

ƒ The Financial Statements
ƒ The Auditors’ Report
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Financial Reports:
The Auditors’ Report
ƒ GAAS (Generally Accepted Auditing Standards)
ƒ Reasonable assurance that financial statements are free of
ƒ

material misstatement
Assess the accounting principles used and significant
estimates made by management

ƒ Actual opinion
ƒ financial statements present fairly, in all material respects, the
ƒ

financial position, the results of operations, etc
...

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Financial Reports:
The Auditors’ Report
ƒ Management responsible for

ƒ the preparation and integrity of the financial statements, etc
...

ƒ Estimated amounts based on management's best estimates

and judgments
...


ƒ The Board has an Audit Committee composed

entirely of outside directors
ƒ This committee appoints the auditor who has direct access
to the Audit Committee
...


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Financial Statements: Balance Sheet

ƒ Balance sheet

ƒ Statement of the financial position of a business as of a
certain date
...
g
...
g
...


ƒ Stockholders’ equity

ƒ initial investment by the owners (capital stock -- common
ƒ

and preferred stocks)
Plus the cumulative sum of undistributed profits (retained
earnings)
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Financial Statements: Income Statement

ƒ
ƒ
ƒ
ƒ
ƒ

Income statement measures the “performance” of a
company over a period of time
Revenues -- a measure of economic benefits generated by
the sale of products or providing of services over a period
of time
Expenses -- a measure of economic sacrifices incurred to
“earn” the revenues of a given period
Examples of expenses -- cost of inventory sold, salaries to
employees, rent and lighting, advertising,
...
g
...

Dividends are not a factor of production
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Financial Statements: Retained
Earnings & Shareholders’ Equity

ƒ Retained earnings
ƒ
ƒ

ƒ A measure of undistributed profits of a business
ƒ Do not include capital contributed by owners
Retained earnings = Cumulative sum of profits
earned from the inception of business (-)
Cumulative sum of all “dividends” distributed to
the owners from the inception of business
Statement of shareholders’ equity describes the
change in retained earnings over a period of time
(e
...
, a year)
ƒ Beginning balance in retained earnings
ƒ Add Net income earned during the period
ƒ Subtract Dividends distributed during the period
ƒ Ending balance in retained earnings

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Summary

ƒ Accounting is a complex field contrary to
common perceptions
...


ƒ To become a sophisticated financial statement

user, you need to understand how the
information in financial statements is recorded

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