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Financial Acumen for Non-Financial

Managers
Overview of Financial Reporting

Richard A. Lambert, Professor of Accounting


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Definition of Accounting

• 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
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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
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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
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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
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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
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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


(Capital, Labor, etc) Governance (Capital markets, product
and Oversight markets, labor markets)

Provide Resources