ACC 8213 Exam 1

Main objective of financial reporting

to provide users with information thats supports investment and management decisions

Three main user groups of financial statements

• investors and equity analysts

• lenders and credit analysts

• company managers

Business activities

• operating activities

• investing activites

• financing activities

Operating activties

companies hire and train employees, manufacture products, deliver services, market and sell their products and services, and manage after-sale customer support

Investing activities

companies acquire land, buildings and equipment, grow the business with new products and services, or acquire other companies to expand into new markets

Financing activities

companies raise cash to fund the operating and investing activities. This includes selling stock to equity investors and borrowing from banks and other lenders

Business activities occur within a particular business environment characterized by a number of business forces which include

market conditions, competitive pressues, and regulations

Business strategy

reflects how it plans to achieve its goals and objectives

A company’s business plan’s success depends on

an effective analysis of market demand and supply

Prior financial statements are

inputs into planning

The four financial statements

balance sheet, income statement, statement of stockholder’s equity, and statement of cash flows

Current financial statements reflect

performance and condition

Demand for financial statements exist as a menas to

facilitate efficient contracting and risk-sharing

Broad classes of users that demand financial accounting information

• managers and employees

• investment analysts and information intermediaries

• creditors and suppliers

• stockholders and directors

• customers and strategic partners

• regulators and tax agencies

• voters and their representatives

Supply of financial statement is driven by

companies’ wish to lower financing costs and other costs such as political, contracting, and labor

__ __ is a bedrock for equity analysis.

Accounting information

Covenants

contractual requirements that restrict the borrower’s behavior in some fashion

Fundamental analysis

uses financial information to estimate company value and to form buy-sell strategies

The quantity and quality of accounting information that companies supply are determined by

managers’ assessment of the benefits and costs of disclosure

Both __ and _ affect disclosure costs and beenfits, thus plaing a role in determing the supply of accounting information.

regulation and bargaining power

In the US, publicly traded firms must file financial accounting information with the

SEC (Securities and Exchange Commission)

The two main comulsory SEC filings

Form 10-K

Form 10-Q

Form 10-K

the audited annual report that includes the four financial statements with explanatory notes and the management’s discussion and analysis (MD&A) of financial results. Must be filed within 60/90 days of the year-end for larger/smaller companies

Form 10-Q

the unaudited quarterly report that includes summary versions of the four financial statements and limited additional disclosures. Must be filed within 40/45 days for larger/smaller companies (except for the fourth quarter which is part of the 10-K)

Benefits of disclosure

companies reap the benefits of disclosure with good news about their products, processes, and management

Costs of disclosure

• preparation and dissemination costs

• competitive disadvantages

• litigation

• political costs

The SEC adopted Regulation Fair Disclosure (or Reg FD) to

curb the practice of selective disclosure by public companies (called issuers by the SEC) to certain stockholders and financial analysts

FASB

FInancial Accounting Standards Board, issues accounting standards, including bulletins, interpretations, and statements of position

GAAP

Generally Accepted Accounting Principles, the standards governing the US financial statements and put together by the SEC, FASB, and the AICPA (American Institute of Certified Public Accountants)

Much of the rest of the world use the ____ rather than the GAAP for their financial reports.

IFRS, International Financial Reporting Standards

The IFRS is overseen by the

International Accounting Standards Board (IASB)