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Communicating and
Interpreting
Accounting Information
Players in the
Management
Management
Preparation
Accounting
Preparation
CEO, CFO,
CFO, Accounting
Accounting Staff
Staff
Communication CEO,
Guided
Guided by
by GAAP
GAAP
Process
5-2
Independent
Independent Auditors
Auditors
Verification
Verification
Partners,
Partners, Managers,
Managers, Staff
Staff
Guided
Guided by
by GAAS
GAAS
An
An unqualified
unqualified opinion
opinion states
states
that
that the
the financial
financial statements
statements are
are
fair
fair presentations
presentations in
in all
all material
material
respects
respects in
in conformity
conformity with
with
GAAP.
GAAP.
McGraw-Hill/Irwin
Players in the
Management
Management
Preparation
Accounting
Preparation
CFO, CEO,
CEO, Accounting
Accounting Staff
Staff
Communication CFO,
Guided
Guided by
by GAAP
GAAP
Process
5-3
Independent
Independent Auditors
Auditors
Verification
Verification
Partners,
Partners, Managers,
Managers, Staff
Staff
Guided
Guided by
by GAAS
GAAS
Information
Information
Intermediaries
Intermediaries
Analysis
Analysis and
and Advice
Advice
Financial
Financial analysis,
analysis,
Information
Information services
services
McGraw-Hill/Irwin
Financial
Financial analysts
analysts
make
make predictions
predictions
concerning
concerning
companies
companies future
future
earnings
earnings and
and stock
stock
prices.
prices.
5-4
Players in the
Management
Management
Preparation
Accounting
Preparation
CFO, CEO,
CEO, Accounting
Accounting Staff
Staff
Communication CFO,
Guided
Guided by
by GAAP
GAAP
Process
Independent
Independent Auditors
Auditors
Verification
Verification
Partners,
Partners, Managers,
Managers, Staff
Staff
Guided
Guided by
by GAAS
GAAS
Information
Information
Intermediaries
Intermediaries
Analysis
Analysis and
and Advice
Advice
Financial
Financial analysis,
analysis,
Information
Information services
services
Government
Government
Regulators
Regulators
Verification
Verification
SEC
SEC Members
Members
Guided
Guided by
by SEC
SEC regs.
regs.
Users
Users
Analysis
Analysis and
and Decision
Decision
Investors,
Investors, Lenders,
Lenders, etc.
etc.
McGraw-Hill/Irwin
Public
companies only
5-5
McGraw-Hill/Irwin
5-6
5-7
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
5-8
McGraw-Hill/Irwin
5-9
Current
Current assets
assets
are
are assets
assets that
that
will
will be
be turned
turned into
into
cash
cash or
or expire
expire
(be
(be used
used up)
up)
within
within the
the longer
longer
of
of one
one year
year or
or the
the
operating
operating cycle.
cycle.
McGraw-Hill/Irwin
5-10
Property,
Property, plant
plant and
and
equipment
equipment includes
includes
assets
assets with
with useful
useful
lives
lives of
of more
more than
than
one
one year
year acquired
acquired
for
for use
use in
in the
the
business
business rather
rather
than
than for
for resale.
resale. The
The
amount
amount is
is reported
reported
net
net of
of accumulated
accumulated
depreciation
depreciation..
McGraw-Hill/Irwin
5-11
Intangible
Intangible assets
assets
have
have no
no physical
physical
existence
existence and
and aa
long
long life.
life. They
They
include
include patents,
patents,
copyrights,
copyrights,
trademarks,
trademarks, etc.
etc.
McGraw-Hill/Irwin
5-12
McGraw-Hill/Irwin
5-13
McGraw-Hill/Irwin
5-14
McGraw-Hill/Irwin
5-15
Long-term
Long-term liabilities
liabilities are
are debts
debts that
that have
have
maturity
maturity dates
dates extending
extending beyond
beyond one
one
year
year from
from the
the balance
balance sheet
sheet date.
date.
McGraw-Hill/Irwin
5-16
Finally, we get
to the
stockholders
equity section
of a classified
balance sheet.
McGraw-Hill/Irwin
5-17
Contributed
Contributed capital
capital is
is often
often shown
shown in
in
two
two separate
separate accounts
accounts .. .. ..
1.
1.Common
Common stock
stock
2.
2.Paid-in
Paid-in capital
capital
McGraw-Hill/Irwin
5-18
Retained
Retained earnings
earnings is
is the
the total
total
earnings
earnings of
of the
the company
company less
less the
the
total
total dividends
dividends declared
declared since
since
inception
inception of
of operations.
operations.
McGraw-Hill/Irwin
5-19
McGraw-Hill/Irwin
5-20
Gross
Gross sales
sales minus any
discounts,
discounts, returns,
returns, and
and
allowances
allowances during
during the
the period.
period.
McGraw-Hill/Irwin
5-21
Cost
Cost of
of inventory
inventory sold.
sold.
McGraw-Hill/Irwin
5-22
Not
Not related
related to
to the
the companys primary
primary
operations.
operations. Usually includes interest income or
expense
expense and
and any
any gains or losses from the
retirement
retirement of
of equipment.
equipment.
McGraw-Hill/Irwin
5-23
McGraw-Hill/Irwin
5-24
Discontinued Operations
Sale
Sale or
or abandonment
abandonment of
of aa segment
segment of
of aa
business.
business.
Income
Income or
or loss
loss on
on
segments
segments operation
operation for
for
the
the period.
period.
Gain
Gain or
or loss
loss on
on
disposal
disposal of
of the
the
segment.
segment.
5-25
Extraordinary Items
Unusual
Infrequent
5-26
GAAP
GAAP
Method
Method
Change to
Alternative
GAAP
GAAP
Method
Method
The
The change
change must
must be
be to
to aa preferable
preferable
method
method and
and must
must be
be disclosed
disclosed in
in notes
notes
to
to financial
financial statements.
statements.
5-27
McGraw-Hill/Irwin
5-28
In
In the
the single-step
single-step format
format,, all
all revenues,
revenues, income,
income,
and
and gains
gains are
are listed
listed first.
first.
Costs,
Costs, expenses,
expenses, and
and losses
losses are
are then
then subtracted
subtracted
from
from total
total revenues
revenues to
to get
get net
net income.
income.
McGraw-Hill/Irwin
5-29
5-30
A nonrecurring
item that is
presented
separately after
income from
operations.
McGraw-Hill/Irwin
5-31
Basic EPS
McGraw-Hill/Irwin
5-32
Diluted EPS
Stock options, debt securities,
equity securities are assumed to
be converted into common stock
at the beginning of the period.
McGraw-Hill/Irwin
5-33
Both
Both basic
basic and
and
diluted
diluted EPS
EPS are
are
reported
reported here.
here.
McGraw-Hill/Irwin
5-34
McGraw-Hill/Irwin
Current Year
Pretax Earnings
Last Year
Pretax Earnings
5-35
McGraw-Hill/Irwin