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    Chap005 2022

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    Chap005 2022

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    Chap005 2022

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    You are on page 1of 20

    Chapter 5

    Communicating and
    Interpreting
    Accounting Information
    Accounting Cycle

    McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies4-2


    5-3

    McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies


    5-4

    McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies


    Understanding the business
    Corporate Governance:
    Procedures to ensure
    that the company is
    managed in the interest
    of the shareholders

    Sarbanes-Oxley Act:
    A law which strengthens
    financial reporting and
    corporate governance
    for public companies.

    McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies5-5


    Players in the Management 5-6

    Accounting Preparation
    CFO, CEO, Accounting Staff
    Communication Guided by GAAP
    Process

    Independent Auditors
    Verification
    Partners, Managers, Staff
    Guided by GAAS

    Information Government
    Intermediaries Regulators
    Analysis and Advice Verification
    Financial analysis, SEC Members
    Information services Guided by SEC regs.

    Users
    Analysis and Decision
    Investors, Lenders, etc. Public
    companies only
    McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies
    The Disclosure Process:
    Annual Reports and Form 10-K
    Annual reports normally include:
    1. Four basic financial statements.
    2. Related notes (footnotes).
    3. Report of Independent Accountants
    (Auditor’s Opinion) if the statements are
    audited.

    The Form 10-K is the annual report that


    publicly traded companies must file with
    the SEC.
    McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies5-7
    5-8

    Disclosure to investors

    • Press releases
    • Annual reports
     Letter to stockholders from the CEO,
    description of the firm philosophy,
    products, successes and prospects for the
    future
    • Quarterly reports

    McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies


    Classified Balance Sheet

    McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies5-9


    5-10

    Consolidated Balance Sheet


    December 31,
    (in thousands, except share data and per shate data) 2000 1999
    LIABILITIES & STOCKHOLDERS" EQUITY
    Shareholders' equity:
    Common stock, $.01 par value, 240,000,000
    shares authorized, 78,958,963 and
    76,302,196 issued and outstanding at
    December 31, 2000 and 1999 $ 790 $ 763
    Paid-in capital 247,838 210,801

    Accumulated other comprehensive income (6,096) 280


    Retained Earnings 349,681 288,090
    592,213 499,934
    Less: Common stock held in treasury, at
    cost, 4,815,241 shares at December 31, 2000
    and none at Decmeber 31, 1999 (80,469) -
    Total stockholders equity 511,744 499,934
    $ 630,934 $ 616,783
    McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies
    5-11

    Classified Income Statement


    General Format for the Classified Income Statement

    Net sales
    − Cost of goods sold
    Gross profit
    − Operating expenses
    Income from operations
    ± Nonoperating revenues/expenses and gains/losses
    Income before income taxes
    − Income tax expense
    Net income

    McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies


    Classified Income Statement

    McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies


    5-12
    Nonrecurring Items
    Income statements report nonrecurring
    items separately because they are not
    useful in predicting the future income
    of a corporation.

    Nonrecurring Items
    1. Discontinued operations
    2. Extraordinary items
    3. Cumulative effect of changes
    in accounting methods
    McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies
    5-13
    5-14
    Consolidated Statement of Income
    (in thousands, except per share data)
    2000 1999
    Net sales $ 837,627 100% $ 719,038 100%
    Cost of goods sold 440,119 53% 384,265 53%
    Gross profit 397,508 47% 334,773 47%
    Selling expenses 170,541 20% 128,565 18%
    General & Admin. expenses 70,333 8% 92,478 13%
    Research and development costs 34,579 4% 34,002 5%
    Restructuring costs - (5,894) -1%
    Sumitomo transition costs - 5,713 1%
    Income from operations 122,055 15% 79,909 11%
    Interest and other income, net 8,791 9,182
    Interest expense (1,524) (3,594)
    Income before income taxes 129,322 16% 85,497 12%
    Provision for income taxes 47,366 30,175
    Cumulative effect of accounting change (957) -
    Net income $ 80,999 10% $ 55,322 8%
    Earnings per common share
    Basic
    A nonrecurring Income before accounting change $ 1.17 $ 0.79
    item that is Cumulative effect of change (0.01)
    $ 1.16 $ 0.79
    presented Diluted
    separately after Income before accounting change $ 1.14 $ 0.78
    Cumulative effect of change (0.01)
    income from $ 1.13 $ 0.78
    operations. Common equivalent shares
    Basic 69,946 70,397
    McGraw-Hill/Irwin Diluted ©71,412
    2004 The McGraw-Hill71,214
    Companies
    Notes to Financial Statements
    Descriptions of the key accounting rules
    applied to the company’s statements.

    Additional detail supporting reported


    numbers.

    Relevant financial information not


    disclosed on the statements.

    McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies


    5-15
    Accounting Rules Applied in the
    Company’s Statements
    The first category of notes, typically one of the first
    notes to the financial statements, is a statement of
    significant accounting policies.

    McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies


    5-16
    Additional Detail Supporting
    Reported Numbers
    The second category of notes provides supplemental
    information concerning the data shown on the financial
    statements.

    McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies


    5-17
    Relevant Financial Information Not
    Disclosed on the Statements
    The final category includes information that impacts the
    company financially but is not shown on the
    statements.

    McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies


    5-18
    Voluntary disclosures
    GAAP and SEC regulations .set the minimum level of
    required disclosures. Many companies provide
    additional information.

    McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies


    5-19
    Differences in Accounting Methods
    acceptable under
    ifrs and u.s. gaap
    Many countries have adopted international financial reporting
    standards (IFRS) issued by the International Accounting
    Standards Board (IASB). IFRS are similar to U.S. GAAP, but
    there are several important differences. The FASB and IASB
    are working together to eliminate these and other differences.

    McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies


    5-20

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