Communicating and Interpreting Accounting Information Chapter 5 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin Slide 2 An unqualified opinion states that the financial statements are fair presentations in all material respects in conformity with GAAP. Independent Auditors Verification Partners, Managers, Staff Guided by GAAS Independent Auditors Verification Partners, Managers, Staff Guided by GAAS ManagementPreparation CEO, CFO, Accounting Staff Guided by GAAP ManagementPreparation CEO, CFO, Accounting Staff Guided by GAAP Players in the Accounting Communication Process

McGraw-Hill/Irwin Slide 3 Information Intermediaries Analysis and Advice Financial analysis, Information services Information Intermediaries Analysis and Advice Financial analysis, Information services Financial analysts make predictions concerning companies’ future earnings and stock prices. Players in the Accounting Communication Process Independent Auditors Verification Partners, Managers, Staff Guided by GAAS Independent Auditors Verification Partners, Managers, Staff Guided by GAAS ManagementPreparation CEO, CFO, Accounting Staff Guided by GAAP ManagementPreparation CEO, CFO, Accounting Staff Guided by GAAP

McGraw-Hill/Irwin Slide 4 Government Regulators Verification SEC Members Guided by SEC regs. Government Regulators Verification SEC Members Guided by SEC regs. Users Analysis and Decision Investors, Lenders, etc. Users Analysis and Decision Investors, Lenders, etc. Public companies only ManagementPreparation CFO, CEO, Accounting Staff Guided by GAAP ManagementPreparation CFO, CEO, Accounting Staff Guided by GAAP Information Intermediaries Analysis and Advice Financial analysis, Information services Information Intermediaries Analysis and Advice Financial analysis, Information services Independent Auditors Verification Partners, Managers, Staff Guided by GAAS Independent Auditors Verification Partners, Managers, Staff Guided by GAAS

McGraw-Hill/Irwin Slide 5 Guiding Principles for Communicating Useful Information Primary Objective of External Financial Reporting To provide economic information to external users for decision making. Primary Objective of External Financial Reporting To provide economic information to external users for decision making. Primary Qualitative Characteristics Relevance: Timely and Predictive Feedback Value Reliability: Accurate, Unbiased, and Verifiable Primary Qualitative Characteristics Relevance: Timely and Predictive Feedback Value Reliability: Accurate, Unbiased, and Verifiable Secondary Qualitative Characteristics Comparability: Across businesses Consistency: Over time Secondary Qualitative Characteristics Comparability: Across businesses Consistency: Over time

McGraw-Hill/Irwin Slide 6 Annual Reports For privately held companies, annual reports are simple documents that include: For privately held companies, annual reports are simple documents that include: 1. Four basic financial statements. 2. Related notes (footnotes). 3. Report of independent accountants (auditor’s opinion) if the statements are audited. For privately held companies, annual reports are simple documents that include: For privately held companies, annual reports are simple documents that include: 1. Four basic financial statements. 2. Related notes (footnotes). 3. Report of independent accountants (auditor’s opinion) if the statements are audited.

McGraw-Hill/Irwin Slide 7 Annual Reports For public companies, annual reports are elaborate due to SEC reporting requirements: For public companies, annual reports are elaborate due to SEC reporting requirements: 1.A Nonfinancial Section  A letter to the stockholders, a description of management’s philosophy, products, successes, etc. 2.A Financial Section  See next slide for a detailed listing... For public companies, annual reports are elaborate due to SEC reporting requirements: For public companies, annual reports are elaborate due to SEC reporting requirements: 1.A Nonfinancial Section  A letter to the stockholders, a description of management’s philosophy, products, successes, etc. 2.A Financial Section  See next slide for a detailed listing...

McGraw-Hill/Irwin Slide 8 Annual Reports 1.Summarized financial data for 5- or 10-years. 2.Management Discussion and Analysis (MD&A). 3.The four basic financial statements. 4.Notes (footnotes). 5.Independent Accountant’s Report and the Management Certification. 1.Summarized financial data for 5- or 10-years. 2.Management Discussion and Analysis (MD&A). 3.The four basic financial statements. 4.Notes (footnotes). 5.Independent Accountant’s Report and the Management Certification. 6.Recent stock price information. 7.Summaries of the unaudited quarterly financial data. 8.Lists of directors and officers of the company and relevant addresses. 6.Recent stock price information. 7.Summaries of the unaudited quarterly financial data. 8.Lists of directors and officers of the company and relevant addresses.

McGraw-Hill/Irwin Slide 9 SEC Reports – 10-K, 10-Q, 8-K Form 10-K Annual Report Due within 90 days of the fiscal year-end. Contains audited financial statements. Form 10-K Annual Report Due within 90 days of the fiscal year-end. Contains audited financial statements. Form 10-Q Quarterly Report Due within 45 days of the end of the quarter. Financial statements can be unaudited. Form 10-Q Quarterly Report Due within 45 days of the end of the quarter. Financial statements can be unaudited. Form 8-K Current Report Due within 15 days of the major event date. Financial statements can be unaudited. Form 8-K Current Report Due within 15 days of the major event date. Financial statements can be unaudited.

McGraw-Hill/Irwin Slide 10 Classified Income Statement General Format for the Classified Income Statement

McGraw-Hill/Irwin Slide 11 Earnings Per Share Basic EPS EPS = Net Income* Average Number of Shares of Common Stock Outstanding During the Period * If there are preferred dividends, the amount is subtracted from the Net Income in the numerator.

McGraw-Hill/Irwin Slide 12 Notes to Financial Statements Descriptions of the key accounting rules that apply to the company’s statements. Additional detail supporting reported numbers. Relevant financial information not disclosed on the statements.

McGraw-Hill/Irwin Slide 13 Discontinued Operations Income or loss on segment’s operation for the period. Gain or loss on disposal of the segment. Gain or loss on disposal of the segment. Sale or abandonment of a segment of a business. Show net of applicable taxes.

McGraw-Hill/Irwin Slide 14 Extraordinary Items UnusualInfrequent Show net of applicable taxes.