Financial Reporting and Analysis

qualified opinion

explains exceptions made in the statement

Valuation Adjustments

accounting entries that update an assets' values

Standard-setting bodies

are professional organizations of accountants and auditors that establish reporting standards

Income statement equation

Net Income = revenue-expenses Net Income = revenues - ordinary expenses + other income - other expenses + gains - losses

Expanding accounting equation

1) assets = liabilities + contributed capital + retained earnings 2) Assets = liabilities + contributed capital + beginning retained earnings + revenue - expenses - dividends

Fundamental Characteristics enhanced

1. Comparability (consistency between statements) 2. Verifiability (Independent observers get the same results) 3. Timeliness (information is available before it is stale) 4. Understand-ability (should be readily able to understand the information available)

General Features of Financial statements

1. Fair presentation 2. Going Concern 3. Accrual Accounting 4. Consistency 4. Materiality 5. Aggregation 6. No Offsetting 7. Reporting Frequency 8. Comparative Information

Revenue Recognized

1. Risk/reward of ownership is transferred 2. No continuing control or management over the goods sold 3. Revenue can be measured 4. Probable flow of economic benefits 5. cost can be measured

Financial Statement analysis framework

1. State the objective and context (the questions the analysis seeks to answer) 2. Gather data (acquire company's financial statements and relevant data on the industry/economy) 3. Process the data (Calculate ratios and prepare graphs/exhibits) 4. Analyze and interpret the data (use data to answer questions stated in step 1) 5. Report the conclusions or recommendations (prepare and communicate it to its intended audience) 6. Update the analysis (repeat these steps periodically)

IASB vs FASB differences

1. The IASB lists income and expenses as performance elements, While the FASB lists revenue, expenses, gains, losses, and comprehensive income 2. There are minor differences in the definition of assets. Also, the FASB uses the word probable when defining assets and liabilities 3. The FASB does not allow the upward revaluation of most assets

required financial statement

1. balance sheet 2. Statement of comprehensive income 3. Cash flow statement 4. Statement of changes in owners' equity 5. Explanatory notes, accounting policies used

Retrospective application

A change in accounting principles. All prior period financial statements are changed

Form 144

A company can issue securities to certain qualified buyers without registering with the SEC but they must be notified

Unusual or infrequent items

Gains or losses from the sale of a business. Impairments, write-offs, write downs, and restructuring costs.

Accounting Equation

Assets = Liabilities + Owners' Equity

General Journal

A listing of all the journal entries in order of their dates

Prior period adjustment

Are made by restating results for all prior periods presented in the current financial statement

Expenses

Are outflows of economic resources: - cost of goods sold - Selling, general, and administrative expenses (advertising, management salaries, rent) - Depreciation and amortization (to reflect the using up of tangible and intangible assets) - tax expense - interest expense - losses

Dilutive Securities

Are stock options, warrants, convertible debt, or convertible preferred stock that would decrease EPS if exercised or converted to common stock

Anti dilutive securities

Are stock options, warrants, convertible debt, or convertible preferred stock that would increaseEPS if exercised or converted to common stock

Accounts

Are the specific records within each element where various transactions are entered

Contra Accounts

Are used for entries that offset some part of the value of another account

Initial trial balance

At the end of the accounting period is prepared that shows the balances in each account

Specific Identification

If a firm can identify exactly which items were sold and which items remain in inventory

Adjusted trial balance

If any adjustments are needed

Installment Method

If collectibility cannot be reasonably estimated

Cost recovery Method

If collectibility is highly uncertain

Weighted Average cost

Method makes no assumption about the physical flow of the inventory

Noncontrolling interest

Minority owner interest is subtracted in arriving at net income because the parent is reporting all of the subsidiary's revenues and expense

Earnings guidance

Before the financial statements are released an earnings announcement may be made

8-K

Companies must file this form to disclose material events

Complex capital structure

Contains potentially dilutive securities such as options, warrants, or convertible securities.

Earnings per Share

EPS: is one of the most commonly used corporate profitability performance measures for publicly traded firms. Only reported for shares of common stock. EPS= (net income - preferred dividends)/ weighted average number of common share outstanding

FASB

Financial Accounting standards Board. In the US they set forth GAAP

FSA

Financial Services Authority. SEC of UK

Financial statement notes

Include disclosures and provide further details about the information summarized in the financial statement. Accounts for the fiscal period, accounting method/assumptions, and any additional information

IASB

International Accounting Standards Board

IFRS

International Financial reporting standards. Rules made by the IASB for global ex US

IOSCO

International Organization of Securities Commississions. most nationals authorities belong to this. 3 objectives 1. protect investors 2. ensure the fairness, efficiency, and transparency of markets 3. reduce systemic risk

Forms 3, 4, and 5

Involve the beneficial ownership of securities by a company's officers and directors

Round-trip transaction

Involves the sale of goods to one party with the simultaneous purchase of almost identical goods from the same party

Discounted Operations

Is one that management has decided to dispose of, but either has not yet done so, or has disposed of in the current year after the operation had generated income or losses.

Stick Dividend

Is the distribution o additional shares to each stockholder in an amount proportional to their current number of shares

Completed-contract Method

Is used when the outcome of the project cannot be reliably estimated.

Extraordinary items

Losses from an expropriation assets, gains/losses from early retirement of debt, uninsured losses from natural disasters

Installment Sale

Occurs when a firm finances a sale and payments are expected to be received over an extended period.

Simple Capital Structure

One that contains no potentially dilutive securities. Contains only common stock, nonconvertible debt, and nonconvertible preferred stock

Journal Entries

Record every transaction, showing which accounts are changed and by what amounts

Stock Split

Refers to the division of each "old" share into a specific number of "new" shares

Financial Reporting

Refers to the way companies show their financial performance to investors, creditors, and other interested parties by preparing and presenting financial statements

S-1

Registration statement filed prior to the sale of new securities to the public

Fundamental Characteristics

Relevance (can information influence an economic decision) and Faithful Representation (is it unbiased)

Statement of Comprehensive income

Reports all changes in equity except for shareholder transactions

Income statement

Reports on the financial performances of the firm over a period of time. The elements of the income statement include revenues (inflows from delivering or producing a good), expenses (outflows from delivering or peoducing a good), and gains/losses (gains that may or may not arise in the ordinary course of business

Statements of Changes in equity

Reports the amounts and sources of changes in equity investors' investment in the firm over a period of tmie

Statements of cash flows

Reports the company's cash receipts and payments. These cash flows are 1. Operating cash flows (include the cash effects of transactions that involve the normal business of the firms) 2. Investing cash flows (results from the acquisition or sale of property, plant, and equipment) 3. Financing cash flow (those resulting from issuance or retirement of the firm's debt and equity securities and include dividends paid to stockholders.

Balance Sheet

Reports the firm's financial position at a point in time consists of 3 elements 1. Assets 2. Liabilities 3. Owners Equity

Revenue

Represents inflows of economic resources: - Sales (Revenue from day-to-day activity) - Gains (Increases in assets from transactions incidental to day-to-day activity) - Investment income (interest and dividends)

10-K

Required annual filing that includes information about the business and management, audited financial statements, and disclosures

Accrual Accounting

Requires that revenue is recorded when the firm earns it and expenses are recorded as the firm incurs them, regardless of whether cash has actually been paid. four types of accruals 1. Unearned revenue (firm receives cash before it provides the good or service) 2. Accrued Revenue (firm provides goods or service before it receives cash payment) 3. Prepaid expenses (The firm pays cash ahead of time for an anticipated expense) 4. Accrued expenses (the firm owes cash for expenses it has incurred)

Change in accounting estimates

Result of a change in management's judgement, usually due to new information. Don't usually affect cash flow.

Net Revenue

Revenue less adjustments for estimated returns and allowance

Operating Profit

Subtracting operating expenses such as selling the item and administrative expenses from gross profit

Amortization

The allocation of the cost of an intangible asset over its useful life

Gross Profit

The amount that remains after the direct costs of producing a product or service are subtracted from revenue

Revenues

The amounts reported from the sale of goods and services in the normal course of business

Measurement Date

The time between the measurement period and the actual disposal date referred to as the phaseout period

Standard auditor's opinion

Three parts 1.states the financial statement are prepared by management and are responsible for the information 2. generally accepted auditing standards were followed 3. the statements were prepared in accordance with accepted accounting principles chosen and estimates made reasonably.

Barter Transaction

Two parties exchange goods or services without cash payment

10-Q

U.S. firms are required to file this form quarterly, with updated financial statements

Financial Statement Analysis

Use the information in a company's financial statements, along with other relevant information, to make economic decisions

DEF-14A

When a company prepares a proxy statement for its shareholders prior to an annual meeting

Percentage-of-completion method

When the outcome of a long-term contract can be reliably estimated. Total cost incurred to date divided by the total expected cost of the project

Matching principle

Where expenses to generate revenue are recognized in the same period as the revenue

Double-entry accounting

a transaction that has to be recorded in at least two accounts

Declining Balance Method (DB)

applies a constant rate of depreciation to an asset's book value each year

Regulatory authorities

are government agencies that have the legal authority to enforce compliance with financial reporting standards

Proxy Statements

are issued to shareholders when there are matters that require a shareholder vote

Financial statement elements

are the major classifications of assets, liabilities, owners' equity, revenues, and expenses

Treasury Stock Method

assumes will purchase shares of company's common stock in the market at average market price. Net increase is the number of shares created by exercising the options less the number of shares repurchased with the proceeds excircised

Liabilities

creditors claims on the company's resources: - Accounts payable and trade payable - Financial liabilities (short-term notes payable) - Unearned revenue (Items that will show up on future statements as revenue - Income taxes payable (taxes accrued over the past year but not paid - Long-term debt - Deferred tax liabilities

assets

firm's economic resources such as: - Cash and cash equivalents (Maturities with > 90 days) - Accounts receivable - Inventory - Financial assets (Marketable equities) - Prepaid expenses (items that will be expenses on future statements) - Property, plant, equipment - Investment in affiliates - Deferred tax assets - Intangible assets (economic resources for the firm that do not have physical form patents/trademarks)

FIFO

first-in, first-out

GAAP

generally accepted accounting principles. FASB makes these rules for the US

Chart of accounts

is a detailed list of the accounts that make up the five financial statements elements

Audit

is an independent review of an entity's financial statements

Management's discussion and analysis (MD&A)

is one of the most useful sections of the annual report. Discusses the nature of the business, past performance, and future outlook. Public firms must discuss trends, identify significant events, and uncertainties that effect the firm's liquidity and capital resources

Owners' Equity

is the owners' residual claim on a firm's resources: - Capital (Par value of common stock) - Additional paid-in capital (Proceeds from common stock sales in excess of par value) - Retained earnings (Cumulative net income not distributed as income) - Other comprehensive income (Changes resulting from foreign currency translation, minimal pension liability adjustments)

LIFO

last-in, first-out

Straight-line depreciation

method used to re-value items that focuses on an equal amount of depreciation expense each period SL depreciation= (cost-residual value)/useful life

adverse opinion

nonconforming with accounting standards

Internal controls

process by which the company ensures that it presents accurate financial statements

Gains and Losses

results in the increase or decrease of economic benefits

Retained earnings

revenues - expenses - dividends

Reconciliation statement

showing the financial results under a different accounting standard

General Ledger

sorts the entries in the general journal account

unqualified opinion

statements are free from material omissions and errors

Expenses

the amount incurred to generate revenue. Includes cost of goods sold, operating expenses, interest, and taxes

Accelerated Depreciation method

usually most assets generate more benefit in the early years of their economic life. Speeds up the recognition of depreciation expense in a systematic way to recognize more depreciation in the early years