• Accounting is a system for recording information about business
transactions and events • To provide summary statements of a company's financial position and performance to users who require such information • Three sets of books • Financial accounting • Standardized reports for external stakeholders • Tax accounting • IRS rules for computing taxes payable • Managerial accounting • Custom reports for internal decision making 11
Financial Reporting Requirements
• Each country has its own financial reporting requirements
• In the U.S., The Securities and Exchange Commission (SEC) requires periodic financial statement filings: • 10 – K: Annual report (within 60 days for big firms) • 10 – Q: Quarterly report (within 40 days for big firms) • 8 – K: Current report (material events) • Proxy, registration, and insider trading statements • In other countries, firms file semi-annual reports instead of quarterly reports • Firms supplement filings with voluntary disclosure • Conference calls, press releases, forecasts, presentations at brokerage conferences 12
Who Makes the Accounting Rules?
• Generally Accepted Accounting Principles (GAAP) are established by:
• U.S. Congress, but they delegate to: • The SEC, but they delegate to: • Financial Accounting Standards Board (FASB) • International Financial Reporting Standards (IFRS) are required in over 100 countries, including the EU • The two sets of rules are increasingly similar, but are not the same 13
Financial Statements Provide Information
About Firms’ Economic Activities
Raise Produce Collect Distribute
Acquire Capital From Goods and From Funds to Resources Investors Services Customers Investors
Reinvest in the Firm
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More Timely Information Requires More Estimation
• Accounting systems slice the firm’s life into arbitrary periods (quarters and years) • This allows for the generation of more timely information • But many activities and decisions made to date aren’t done – they still have implications for future cash flows 15
Annual Report Contents
• Discussion of • Firm’s strategy, products, competitive environment • Financial statistics • Management discussion and analysis (MD&A) • Financial statements • Footnotes • These explain the accounting procedures used by the firm and discuss various assumptions regarding how the numbers were calculated 16
What are the Required Financial Statements?
• Balance Sheet • Financial position (listing of resources & obligations) on a specific date • Assets = Liabilities + Stockholders’ Equity • Income Statement • Result of operations over a period of time • Net income = Revenues – Expenses • Statement of Cash Flows • Sources and uses of cash during a period of time • Operating, Investing, and Financing Activities • Statement of Stockholders’ Equity • Change in stockholders’ equity over a period of time Role of Financial Reporting Regulators Other Factors (FASB,SEC,IRS, Auditors)
Recognition Rules & Concepts Measurement
Financial Statements Management’s Economic Events Management’s (Balance Sheet, Strategy Decisions (Cash & Noncash) Accounting Choices Income Statement, Cash Flow) Other Other Communications Shape Incentives Communications
Resources Board of Directors – External Decision Makers
