Financial Reporting and Analysis

Financial Reporting and Analysis
Chapter 6 Financial Reporting and Analysis Multimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University

Learning Objectives State the objectives of financial reporting.
State the qualitative characteristics of accounting information and describe their interrelationships. Define and describe the conventions of comparability and consistency, materiality, conservatism, full disclosure, and cost-benefit. Copyright © Houghton Mifflin Company. All rights reserved.

Learning Objectives (cont’d)
Explain management’s responsibility for ethical financial reporting and define fraudulent financial reporting. Identify and describe the basic components of a classified balance sheet. Prepare multistep and single-step classified income statements. Evaluate liquidity and profitability using classified financial statements. Copyright © Houghton Mifflin Company. All rights reserved.

Objectives of Financial Accounting
State the objectives of financial reporting Copyright © Houghton Mifflin Company. All rights reserved.

Purpose of Financial Accounting
To provide financial information about a company, particularly its ability to generate adequate cash flows Interested parties include Investors Interested in returns from dividends and the market price of their investment Creditors Interested in a company’s ability to repay debt Copyright © Houghton Mifflin Company. All rights reserved.

Objectives of Financial Information
The Financial Accounting Standards Board (FASB) has developed three objectives of financial reporting These objectives are based on the information needs of users and the general business environment Copyright © Houghton Mifflin Company. All rights reserved.

Objectives of Financial Information
To furnish information that is useful in making investment and credit decisions Information that can help present and potential investors and creditors make rational investment and credit decisions To provide information useful in assessing cash flow prospects Information to help users judge the amounts, timing, and risk of expected cash receipts from dividends or interest and the proceeds from the sale, redemption, or maturity of stocks and loans To provide information about business resources, claims to those resources, and changes in them Information about, and the effects of transactions on, the company’s assets, liabilities, and owner's equity Copyright © Houghton Mifflin Company. All rights reserved.

Financial Statements Balance sheet Income statement
Statement of owner’s equity Statement of cash flows Financial statements are the most important outcome of the accounting system They communicate financial information gathered and processed in the accounting system to parties outside the business Copyright © Houghton Mifflin Company. All rights reserved.

Financial Statements (cont’d)
Are general purpose because of their wide audience Are external because their users are outside the business Are often audited by outside accountants to increase confidence in their reliability Managers, who prepare the statements, potentially have a conflict of interest with investors and creditors, who invest in or lend money to the business Copyright © Houghton Mifflin Company. All rights reserved.

Discussion What are the three objectives of financial reporting?
According to the Financial Accounting Standards Board, the three objectives of financial reporting are: To furnish information useful in making investment and credit decisions To provide information useful in assessing cash flow prospects To provide information about business resources, claims to those resources, and changes in them Copyright © Houghton Mifflin Company. All rights reserved.

Qualitative Characteristics of Accounting Information
Objective 2 State the qualitative characteristics of accounting information and describe their interrelationships Copyright © Houghton Mifflin Company. All rights reserved.

The Goal of Accounting Information
To provide the basic data that different users need to make informed decisions The goal is an ideal In practice, accounting information Is neither simple nor precise Rarely satisfies all criteria Often results from approximate measures Based on rules and conventions rather than exact amounts Copyright © Houghton Mifflin Company. All rights reserved.

Concepts to Facilitate Interpretation of Accounting Information
Qualitative characteristics of accounting information Standards for judging accounting information Generally accepted conventions for recording and reporting Simplify interpretation of accounting information Copyright © Houghton Mifflin Company. All rights reserved.

Qualitative Characteristics and the Conventions of Accounting Information
Copyright © Houghton Mifflin Company. All rights reserved.

Qualitative Characteristics of Accounting Information
… are standards for judging accounting information Developed to facilitate interpretation of accounting information Necessary because approximate measures are used to produce the information Estimates Classifications Summarizations Judgments Allocations Copyright © Houghton Mifflin Company. All rights reserved.

Qualitative Characteristics
Understandability Preparing financial statements in accordance with accepted practices is believed to generate information that is understandable The decision maker (user) must judge what information to use, how to use it, and what it means Usefulness To be useful, information must be relevant and reliable Copyright © Houghton Mifflin Company. All rights reserved.

Relevance Means that the information applies to the outcome of a decision To be relevant, information must Provide feedback Help predict future conditions Be timely Copyright © Houghton Mifflin Company. All rights reserved.

Reliability Means that the user must be able to depend on the information To be reliable, information must be A faithful representation Credible and verifiable by independent parties Neutral Copyright © Houghton Mifflin Company. All rights reserved.

Discussion What are qualitative characteristics of accounting information, and why are they important? Qualitative characteristics are standards for judging the information that accountants give to decision makers Accountants try to provide information that is understandable and useful Copyright © Houghton Mifflin Company. All rights reserved.

Discussion (cont’d) Understandable means that the user is able to interpret the information Usefulness depends on the characteristics of relevance and reliability Relevance requires that the information give feedback, help make predictions, and be timely Reliability requires that the information represent what it is supposed to represent, and be credible, verifiable, and neutral Copyright © Houghton Mifflin Company. All rights reserved.

Conventions That Help in the Interpretation of Financial Information
Objective 3 Define and describe the conventions of comparability and consistency, materiality, conservatism, full disclosure, and cost-benefit Copyright © Houghton Mifflin Company. All rights reserved.

Conventions Rules of thumb
Used by accountants when recording transactions and preparing financial statements Aid in the interpretation of financial statements Necessary because of difficulties associated with financial statements Difficulties result from The fact financial statements are based on estimates The application of accounting rules for recognition and allocation Copyright © Houghton Mifflin Company. All rights reserved.

Conventions (cont’d) Five conventions help in the interpretation of financial statements Comparability and consistency Materiality Conservatism Full disclosure Cost-benefit Copyright © Houghton Mifflin Company. All rights reserved.

Comparability Means information is presented so that decision makers can recognize Similarities Differences Trends Over different time periods Between companies Copyright © Houghton Mifflin Company. All rights reserved.

Consistency Means constantly applying policies or principles
Once an accounting procedure is adopted by a company, it must remain in use from one period to another, unless users are informed of a change Users can assume that no arbitrary changes in accounting measures and procedures have taken place when interpreting financial statements Copyright © Houghton Mifflin Company. All rights reserved.

Consistency (cont’d) Changes in accounting measures and procedures may become necessary Example: A method of accounting for inventory may be changed because it is believed that the new method improves the matching of revenues and costs Generally accepted accounting principles require that changes and their dollar effects be described in the notes to the financial statements Copyright © Houghton Mifflin Company. All rights reserved.

Materiality Refers to the importance of an item or event
If an item is relevant to the decisions a user of financial statements makes, it is material Is normally determined by relating an item’s dollar value to an element of the financial statements Some accountants believe an item that is 5% or more of net income is relevant Depends on the nature of the item The discovery of a bribe or theft, no matter what the amount involved, is considered material Copyright © Houghton Mifflin Company. All rights reserved.

Conservatism Means that when there is uncertainty about which accounting procedure to use, the one that is least likely to overstate assets and income should be used Should be used only when uncertainty exists If used incorrectly, leads to incorrect and misleading financial statements A common application is use of the lower-of-cost-or-market method of accounting for inventories If market value > cost, use cost If market value < cost, use market value Copyright © Houghton Mifflin Company. All rights reserved.

Full Disclosure Requires that financial statements and their notes present all information relevant to users Financial statements should offer explanations needed to keep them from being misleading Many disclosures are required by the SEC and other official bodies Other disclosures are based on the judgment of management and the company accountants If too much information is disclosed, the notes impede rather than help understanding Copyright © Houghton Mifflin Company. All rights reserved.

Examples of Required Disclosures
Changes of accounting practices Amount of depreciation expense on income statement Amount of accumulated depreciation on the balance sheet Accounting procedures used in preparing financial statements Important terms of the company’s debt Commitments and contingencies Important events taking place after the date of the statements Copyright © Houghton Mifflin Company. All rights reserved.

Cost-Benefit Holds that the benefits of providing accounting information should exceed the costs of providing it Information must meet minimum levels of reliance and reliability to be useful Beyond that, the FASB and SEC, who require information, and the accountant, who provides information, must judge the costs and benefits in each case Copyright © Houghton Mifflin Company. All rights reserved.

Costs and Benefits Costs Benefits
Fall at first on the preparers of financial statements Ultimately are passed on to society in the form of prices Benefits Reaped by both the preparers and users of financial statements Ultimately are passed on to society in the form of social benefits from more efficient allocation of resources Copyright © Houghton Mifflin Company. All rights reserved.

Discussion What are the accounting conventions?
The five conventions that help users interpret financial statements are Comparability and consistency Materiality Conservatism Full disclosure Cost-benefit Copyright © Houghton Mifflin Company. All rights reserved.

Management’s Responsibility for Ethical Reporting
Objective 4 Explain management’s responsibility for ethical financial reporting and define fraudulent financial reporting Copyright © Houghton Mifflin Company. All rights reserved.

Fraudulent Financial Reporting
… is the intentional preparation of misleading financial statements Can result from The distortion of records The manipulation of inventory records Falsified transactions Fictitious sales or orders The misapplication of accounting principles Expensing an item that should be treated as an asset Copyright © Houghton Mifflin Company. All rights reserved.

Incentives for Fraudulent Financial Reporting
To obtain a higher price when a company is sold To meet the expectations of stockholders To obtain a loan Personal gain Additional compensation Promotion Avoidance of penalties for poor performance Copyright © Houghton Mifflin Company. All rights reserved.

Costs of Fraudulent Financial Accounting
Personal costs to those authorizing or preparing fraudulent financial statements Criminal penalties Financial loss Other parties affected Investors Lenders Employees Customers Copyright © Houghton Mifflin Company. All rights reserved.

Responsibility for Ethical Reporting
Management Ultimately, responsibility for ethical reporting falls on management Management must insist on honest and accurate financial reporting Achieved by maintaining a system of internal controls Accountants Must maintain high ethical standards Achieved by applying financial accounting concepts Copyright © Houghton Mifflin Company. All rights reserved.

Sarbanes-Oxley Act Passed by Congress in 2002
In response to abuses in financial reporting by companies such as WorldCom and Enron Orders the SEC to draw up rules requiring chief executives and chief financial officers of publicly traded companies to file statements swearing that their company’s quarterly and annual statements are accurate and complete, based on their knowledge Copyright © Houghton Mifflin Company. All rights reserved.

Discussion Who is responsible for preparing reliable financial statements, and what is a principal way of fulfilling the responsibility? Management is responsible for the preparation of reliable financial statements. Management fulfills its responsibility by maintaining a system of internal controls Copyright © Houghton Mifflin Company. All rights reserved.

Classified Balance Sheet
Objective 5 Identify and describe the basic components of a classified balance sheet Copyright © Houghton Mifflin Company. All rights reserved.

Classified Financial Statements
... are general purpose financial statements divided into useful subcategories Classifying often makes financial statements more useful Investors and creditors study the relationships among the subcategories Copyright © Houghton Mifflin Company. All rights reserved.

Classified Balance Sheet
Assets, liabilities, and owner's equity sections are subdivided into useful categories Most companies use similar subdivisions, but subdivisions usually depend upon the type of business Copyright © Houghton Mifflin Company. All rights reserved.

Assets Often divided into four categories
Current assets Investments Property, plant, and equipment Intangible assets The categories are listed according to how easily they are assumed to be converted into cash Some companies may group investments, intangible assets, and other miscellaneous assets as “other assets” Copyright © Houghton Mifflin Company. All rights reserved.

or within the normal operating cycle of the business,
Current Assets … cash and other assets that are reasonably expected to be converted to cash, sold, or consumed within one year or within the normal operating cycle of the business, whichever is longer Copyright © Houghton Mifflin Company. All rights reserved.

Reasonable Expectation
Current assets include assets other than cash that are reasonably expected to be converted to cash, sold, or consumed within one year This means that it is probable and likely that, under normal circumstances, these assets will be converted to cash, sold, or consumed within one year Under normal circumstances Copyright © Houghton Mifflin Company. All rights reserved.

Normal Operating Cycle
The average time needed to go from cash to cash Spend cash to buy merchandise inventory Sell inventory on account Collect cash The normal operating cycle is usually less than one year Exceptions Products requiring more than one year to produce Tobacco Companies selling on the installment basis Appliances Copyright © Houghton Mifflin Company. All rights reserved.

Current Assets Include Cash Temporary investments Accounts receivable
Inventory Prepaid expenses Copyright © Houghton Mifflin Company. All rights reserved.

that are not used in the normal operation of the business
Investments … are assets, usually long-term, that are not used in the normal operation of the business and that management does not plan to convert to cash within the next year Copyright © Houghton Mifflin Company. All rights reserved.

Types of Investments Securities held for investment
Long-term notes receivable Land held for future use Plant or equipment not used in the business Special funds established to Pay off debt Purchase a building Large permanent investments in another company For the purpose of controlling that company Copyright © Houghton Mifflin Company. All rights reserved.

Property, Plant, and Equipment
… includes long-term assets used in the continuing operation of the business These assets represent a place to operate (land and buildings) and equipment to produce, sell, deliver, and service the company’s goods Copyright © Houghton Mifflin Company. All rights reserved.

Classifying Natural Resources
Natural resources used in the regular course of business are listed in the property, plant, and equipment category Forest lands Oil and gas properties Coal mines If the natural resources are not used in the course of running the business, they are listed in the investments category Copyright © Houghton Mifflin Company. All rights reserved.

Property, Plant, and Equipment
Also called Operating assets Fixed assets Tangible assets Long-lived assets Plant assets The costs of these assets are depreciated Spread over the periods they benefit Past depreciation is recorded in the Accumulated Depreciation accounts Copyright © Houghton Mifflin Company. All rights reserved.

Balance Sheet Presentation for Property, Plant, and Equipment
The order in which property, plant, and equipment items are listed on the balance sheet is not the same for every company Accounts are often combined to make the financial statements less cluttered Many companies simply report a total for property, plant, and equipment Details are provided in a note to the financial statements Copyright © Houghton Mifflin Company. All rights reserved.

that have no physical substance
Intangible Assets … are long-term assets that have no physical substance but have a value based on rights or privileges that belong to their owner These assets are recorded at cost The cost is spread over the expected life of the right or privilege Copyright © Houghton Mifflin Company. All rights reserved.

Intangible Assets (cont’d)
Examples Patents Copyrights Goodwill Franchises Trademarks Copyright © Houghton Mifflin Company. All rights reserved.

Liabilities … are divided into two categories
based on when they fall due: Current liabilities and Long-term liabilities Copyright © Houghton Mifflin Company. All rights reserved.

Current Liabilities … are obligations due to be paid or performed within one year or within the normal operating cycle, whichever is longer Are typically paid from current assets or by incurring new short-term liabilities Copyright © Houghton Mifflin Company. All rights reserved.

Current Liabilities (cont’d)
Examples Notes payable Accounts payable Current portion of long-term debt Salaries and wages payable Taxes payable Customer advances (unearned revenues) Copyright © Houghton Mifflin Company. All rights reserved.

Long-Term Liabilities
… are debts of the business that fall due more than one year in the future or beyond the normal operating cycle, or that are to be paid out of noncurrent assets Copyright © Houghton Mifflin Company. All rights reserved.

Long-Term Liabilities (cont’d)
Examples Mortgages payable Long-term notes Bonds payable Employee pension obligations Long-term lease liabilities Copyright © Houghton Mifflin Company. All rights reserved.

Owner’s Equity Also called
Proprietorship Capital Net worth All represent the owner’s interest in the company For accounting purposes, net worth is not a preferable term, because Most assets are recorded at original cost, not current value Therefore, the ownership section does not represent “worth” It is actually a claim against the assets of the company Copyright © Houghton Mifflin Company. All rights reserved.

Form of Business Organization and the Balance Sheet
The form of business organization affects the equity section of the balance sheet Sole proprietorship Partnership Corporation Asset and liability sections are usually not affected by the form of business organization Copyright © Houghton Mifflin Company. All rights reserved.

Each partners’ capital amount is listed separately
Partnership The equity section for a partnership is much like that for a sole proprietorship Called Partners’ Equity Each partners’ capital amount is listed separately Copyright © Houghton Mifflin Company. All rights reserved.

Corporation Is a separate legal entity from its owners, who are called stockholders The equity section of the balance sheet for a corporation is called stockholders’ equity Has two parts Contributed, or paid-in, capital Retained earnings Copyright © Houghton Mifflin Company. All rights reserved.

Corporation Contributed capital also called paid-in capital
Reflects the amounts of assets contributed by stockholders Generally, contributed capital is shown by two amounts Par value of the issued stock Amounts paid in, or contributed, in excess of the par value per share Copyright © Houghton Mifflin Company. All rights reserved.

Corporation Retained earnings are also called earned capital
Represent stockholders' claims to assets that are earned from operations and reinvested in corporate operations Dividends reduce the Retained Earnings account balance Similar to owner’s withdrawals reducing the Capital account balance in a sole proprietorship Copyright © Houghton Mifflin Company. All rights reserved.

Dell Computer Corporation Consolidated Statement of Financial Position

Dell Computer Corporation Consolidated Statement of Financial Position (cont’d)

Graphical Presentation of Dell Computer Corporation’s Balance Sheet

Discussion How would a mortgage that is paid monthly for 120 months be classified? Current liability The portion due during the next year or the current operating cycle Long-term liability The portion due after next year or the current operating cycle Copyright © Houghton Mifflin Company. All rights reserved.

Forms of the Income Statement
Objective 6 Prepare multistep and single-step classified income statements Copyright © Houghton Mifflin Company. All rights reserved.

Forms of the Income Statement
Condensed financial statements Present only the major categories of the detailed financial statements Two common forms of condensed income statement Multistep form Single-step form Copyright © Houghton Mifflin Company. All rights reserved.

Multistep Income Statements
… go through a series of steps, or subtotals, to arrive at net income Same as the step-by-step, detailed income statement except only total amounts of significant categories are given Two sections Income from operations Gross margin less operating expenses Other revenues and expenses Copyright © Houghton Mifflin Company. All rights reserved.

Condensed Multistep Income Statement
By separating income from operations and other revenues and expenses, the multistep income statement facilitates analysis of a company’s normal business operations Copyright © Houghton Mifflin Company. All rights reserved.

Single-Step Income Statement
… is a condensed income statement that arrives at net income in a single step First section includes major categories of revenues Second section includes major categories of expenses Total Revenues – Total Expenses = Income Before Income Taxes Copyright © Houghton Mifflin Company. All rights reserved.

Condensed Single-Step Income Statement

Advantages of Single-Step and Multistep Income Statements
Single-step form Simplicity Multistep form Shows the components used in deriving net income Copyright © Houghton Mifflin Company. All rights reserved.

Reading and Graphing Real Company Income Statements
As with balance sheet presentations, rarely will two companies have income statements that are exactly alike Graphical presentations of the income statement help visualize Relative amounts Components of the statements in relation to other components Changes in the financial statements Increases and decreases in each component Copyright © Houghton Mifflin Company. All rights reserved.

Income Statement for Dell Computer Corporation

Graphical Presentation of Dell Computer Corp.’s Income Statement

Discussion Why are other revenues and expenses separated from operating revenues and expenses in the multistep income statement? So that income from operations (the actual business of the company) can be isolated from the financing and non-operating aspects Copyright © Houghton Mifflin Company. All rights reserved.

Using Classified Financial Statements
Information in financial statements may be used to evaluate two important goals of management Maintaining adequate liquidity Achieving satisfactory profitability A series of ratios are used to evaluate these two goals Copyright © Houghton Mifflin Company. All rights reserved.

Evaluating Liquidity Liquidity means
having enough cash on hand to pay bills when they become due and to cover unexpected needs for cash Two measures of liquidity Working capital Current ratio Copyright © Houghton Mifflin Company. All rights reserved.

Working Capital (cont’d)
Current assets Assets that will be converted to cash or used up within one year or one operating cycle, whichever is longer Current liabilities Debts that must be paid or obligations that must be performed within one year or one operating cycle, whichever is longer Copyright © Houghton Mifflin Company. All rights reserved.

Working Capital (cont.)
By definition, current liabilities are paid out of current assets The excess of current assets over current liabilities is the net current assets on hand to continue operations Total Current Assets – Total Current Liabilities = Net Current Assets Available to Continue Business Operations If Total Current Assets – Total Current Liabilities = Working Capital then Working Capital = Net Current Assets Available to Continue Business Operations Copyright © Houghton Mifflin Company. All rights reserved.

Working Capital (cont’d)
Working capital is used to buy inventory, obtain credit, and finance expanded sales Lack of working capital can lead to a company's failure Compute working capital for Shafer Auto Parts Company Copyright © Houghton Mifflin Company. All rights reserved.

… is the ratio of current assets to current liabilities
Current Ratio … is the ratio of current assets to current liabilities Is closely related to working capital Believed by many to be a good indicator of a company’s ability to Pay its bills Repay outstanding debt Copyright © Houghton Mifflin Company. All rights reserved.

Evaluating Profitability
Profitability means the ability to earn a satisfactory income Common profitability measures Profit margin Asset turnover Return on assets Debt to equity Return on equity Copyright © Houghton Mifflin Company. All rights reserved.

… shows the percentage of each sales dollar that results in net income
Profit Margin … shows the percentage of each sales dollar that results in net income Compute the profit margin for Shafer Auto Parts This means that on each dollar of net sales, Shafer Auto Parts made 6.2 cents Copyright © Houghton Mifflin Company. All rights reserved.

… measures how efficiently assets are used to produce sales
Asset Turnover … measures how efficiently assets are used to produce sales This ratio shows a meaningful relationship between an income statement figure and a balance sheet figure It shows how many dollars of sales were generated by each dollar of assets A high asset turnover means a company uses its assets productively Copyright © Houghton Mifflin Company. All rights reserved.

Asset Turnover (cont’d)
Compute asset turnover for Shafer Auto Parts Company Average total assets is computed by adding total assets at the beginning of the year to total assets at the end of the year and dividing by 2 This means that Shafer produces $1.90 in sales for each $1.00 invested in average total assets Copyright © Houghton Mifflin Company. All rights reserved.

… measures how efficiently a company uses its assets to produce income
Return on Assets … measures how efficiently a company uses its assets to produce income Copyright © Houghton Mifflin Company. All rights reserved.

Return on Assets (cont’d)
Combines profit margin and asset turnover Indicates income-generating strength of the company’s resources Indicates how efficiently the company is using all its assets Return on assets overcomes the limitations of profit margin and asset turnover ratios Profit margin does not consider the assets necessary to produce income Asset turnover ratio does not take into account the amount of net income produced Copyright © Houghton Mifflin Company. All rights reserved.

Return on Assets (cont’d)
Compute return on assets for Shafer Auto Parts Company Average total assets is computed by adding total assets at the beginning of the year to total assets at the end of the year and dividing by 2 This means that for each dollar invested by the owner, Shafer’s assets generate 11.6 cents of net income Or, Difference due to rounding Copyright © Houghton Mifflin Company. All rights reserved.

Debt to Equity … shows the portion of the company financed by creditors in comparison to that financed by the owner A company with a high debt to equity ratio is riskier in poor economic times because it must continue to repay creditors A company with a low debt to equity ratio is safer because the owner does not have to be repaid Copyright © Houghton Mifflin Company. All rights reserved.

Debt to Equity (cont’d)
The assets of a company are financed by Creditors (creating liabilities) Owners A debt to equity ratio of 1.0 means that half the company’s assets are financed by creditors and half are financed by the owner Represents assets financed by creditors Represents assets financed by the owner Copyright © Houghton Mifflin Company. All rights reserved.

Compute debt to equity for Shafer Auto Parts Company
Debt to Equity (cont.) Compute debt to equity for Shafer Auto Parts Company A ratio less than 1.0 (or 100%) means that less than half of the company’s assets are financed by creditors and more than half are financed by the owner For every 61.4 cents of financing from creditors, $1.00 of financing came from the owner Copyright © Houghton Mifflin Company. All rights reserved.

Return on Equity … measures how much income was earned on each dollar invested by the owner Acceptability of a company’s return on equity ratio depends on how much the company earned in prior years other companies in the same industry earned Copyright © Houghton Mifflin Company. All rights reserved.

Return on Equity (cont’d)
Compute return on equity for Shafer Auto Parts Company Average owner's equity is computed by adding total owner's equity at the beginning of the year to total owner's equity at the end of the year and dividing by 2 This means that Shafer earned 18.0 cents on every dollar invested by the owner Copyright © Houghton Mifflin Company. All rights reserved.

Graphical Presentation of Dell Computer Corp.’s Profitability Ratios

Discussion Which is the more important goal, liquidity or profitability? Explain your answer The goals of liquidity and profitability are equally important. Both must be met if a business is to survive Copyright © Houghton Mifflin Company. All rights reserved.

Time for Review State the objectives of financial reporting
State the qualitative characteristics of accounting information and describe their interrelationships Define and describe the conventions of comparability and consistency, materiality, conservatism, full disclosure, and cost-benefit Copyright © Houghton Mifflin Company. All rights reserved.

And Finally… Explain management’s responsibility for ethical financial reporting and define fraudulent financial reporting Identify and describe the basic components of a classified balance sheet Prepare multistep and single-step classified income statements Evaluate liquidity and profitability using classified financial statements Copyright © Houghton Mifflin Company. All rights reserved.

Financial Reporting and Analysis

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