(c) 2007 prentice hall, inc.1-1 financial statements an overview mapormaze

(C) 2007 Prentice Hall, Inc.(C) 2007 Prentice Hall, Inc.

1-1-11

Financial StatementsFinancial StatementsAn OverviewAn Overview

MaporMaze


1-1-22

Financial StatementsFinancial StatementsAn OverviewAn Overview

Map

Auditor’s Report

Statement of Cash Flows

MD&A

Statement of Shareholders’ EquityBalance Sheet

Note

s

Inco

me S

tate

ment

orMaze


1-1-33

Our Objective:Our Objective:

To ensure that financial statements To ensure that financial statements serve as a map, not a mazeserve as a map, not a maze

The better one can read and The better one can read and understand the financial understand the financial statements, the more useful statements, the more useful they are as a MAP to intelligent they are as a MAP to intelligent decision-making decision-making


1-1-44

Volume of Information:Volume of Information:The Annual ReportThe Annual Report

1.1. Introduction (period covered; board of Introduction (period covered; board of directors; change in capital; dividends directors; change in capital; dividends distributed in the last 3 years; major distributed in the last 3 years; major shareholders; business industry) shareholders; business industry)

2.2. ActivitiesActivities1.1. InvestmentsInvestments2.2. Production of Goods and ServicesProduction of Goods and Services3.3. Financial StructureFinancial Structure

1.1. Financial StatementsFinancial Statements

4.4. AdministrativeAdministrative

3.3. Proposed Profit Distribution Proposed Profit Distribution


1-1-55

Financial StatementsFinancial Statements

Prepared according to generally Prepared according to generally accepted accounting principles accepted accounting principles (GAAP)(GAAP)

Present financial information that is Present financial information that is understandable by users ANDunderstandable by users AND

relevant and reliable for relevant and reliable for decisiondecision

making making


1-1-66

GAAPGAAP Global: Two major accounting Global: Two major accounting

standards:standards: IFRS (IASB)IFRS (IASB) US GAAP (FASB)US GAAP (FASB)

TURKEYTURKEY Capital Markets Board StandardsCapital Markets Board Standards TAS (TMSK)TAS (TMSK)


1-1-77

Classification of Accounting Classification of Accounting SystemsSystems Continental Europe Anglo Saxon

Economic Environment

Capital MArkets Funds obtained through the banking system

Funds obtained through capital markets

Legal System Detailed laws and regulations Case based laws

Fiscal system Financial accounting and tax regulations are interrelated

Tax regulations don’t affect financial accounting

Objective of Accounting

Users of accounting information

Banks and other financial institutions, tax offices and investors

Especially investors

Accounting principles Aims at accurate tax assessment

Aims at accurate reporting of financial position

Scope of disclosure Inadequate disclosure Disclose information as much as possible

Examples Turkey Belgium Germany France Italy Japan Portugal Switzerland

Australia United Kingdom Ireland Canada New Zeland Netherlands Singapore USA


1-1-88

Development of International Development of International Accounting StandardsAccounting Standards

International Financial Reporting International Financial Reporting Standards (IFRS-IASB)Standards (IFRS-IASB)

14 member committee of auditors, 14 member committee of auditors, accountants, academics and financial accountants, academics and financial statement usersstatement users

Developed International Accounting Developed International Accounting Standards (IAS) to help investors cope with Standards (IAS) to help investors cope with financial analysis in global capital marketsfinancial analysis in global capital markets

Currently in use by European Union, Currently in use by European Union, Australia, South Africa …Australia, South Africa …


1-1-99

Where to Find a Where to Find a Company’s Financial Company’s Financial Statements:Statements:

Istanbul Stock Exchange web siteIstanbul Stock Exchange web sitehttp://www.imkb.gov.tr/bilanco/http://www.imkb.gov.tr/bilanco/

mtablodonem.htm mtablodonem.htm

Annual reportAnnual report Website of the companyWebsite of the company


1-1-1010

The Four Basic The Four Basic Financial StatementsFinancial Statements

1.1. Balance SheetBalance Sheet

2.2. Income Statement or Earnings Income Statement or Earnings Statement Statement

3.3. Statement of Stockholders’ Statement of Stockholders’ EquityEquity

4.4. Statement of Cash FlowsStatement of Cash Flows


1-1-1111

Financial Statement NotesFinancial Statement Notes

An INTEGRAL part of the statementsAn INTEGRAL part of the statements Provide summary of accounting policiesProvide summary of accounting policies Present detail about particular accounts Present detail about particular accounts

(e.g. inventory, investments, etc.)(e.g. inventory, investments, etc.) Include other information (e.g. leasing Include other information (e.g. leasing

arrangements, pending legal arrangements, pending legal proceedings, income taxes, etc.) proceedings, income taxes, etc.)


1-1-1212

Financial Statement NotesFinancial Statement Notes (cont.)(cont.) some supplementary informationsome supplementary information

such as:such as: Information on foreign currency Information on foreign currency

translations for firms operating in translations for firms operating in foreign countriesforeign countries

Information by segment for firms Information by segment for firms with several lines of businesswith several lines of business


1-1-1313

Auditor’s ReportAuditor’s Report

UnqualifiedUnqualified

QualifiedQualified

Adverse opinionAdverse opinion

Disclaimer of opinion Disclaimer of opinion


1-1-1414

Auditor’s Report Auditor’s Report (cont.)(cont.)

UnqualifiedUnqualified (what you want!) (what you want!) Statements present information in Statements present information in

conformity with GAAPconformity with GAAP


1-1-1515


1-1-1616


UnqualifiedUnqualified (what you want!) (what you want!) Statements present information in Statements present information in

conformity with GAAPconformity with GAAP

QualifiedQualified Reports other than an unqualified Reports other than an unqualified

opinion due to various opinion due to various circumstancescircumstances

Typically use word “except for”Typically use word “except for”


1-1-1717


1-1-1818


Adverse opinion Adverse opinion (not what you (not what you want!) want!)

Financial statements have not been Financial statements have not been presented fairly in accordance with presented fairly in accordance with

GAAPGAAP


1-1-1919


Disclaimer of opinion Disclaimer of opinion isis issued issued whenwhen

auditor can’t evaluate the fairness of auditor can’t evaluate the fairness of the statements and expresses no the statements and expresses no opinionopinion

there is material scope limitation of there is material scope limitation of the auditthe audit

there is lack of independence by the there is lack of independence by the auditorauditor

remember, the auditor is hired by the remember, the auditor is hired by the firm being audited, so there is always firm being audited, so there is always the possibility of conflict of interestthe possibility of conflict of interest


1-1-2020


Unqualified opinion with Unqualified opinion with explanatory languageexplanatory language is is warranted when there is warranted when there is

a consistency departure due to a a consistency departure due to a change in accounting principlechange in accounting principle

uncertainty caused by future events uncertainty caused by future events such as contract disputes and such as contract disputes and lawsuits lawsuits

an event (or events) that the auditor an event (or events) that the auditor wisheswishes to describe because they to describe because they maymay present business risk and/or present business risk and/or going-concerngoing-concern problemsproblems


1-1-2121


1-1-2222

Why use financial Why use financial statements? statements?

Financial position of the companyFinancial position of the company Success of its operationsSuccess of its operations Policies and strategies of Policies and strategies of

managementmanagement Insight into future performanceInsight into future performance

Savvy use of financial statements allows user to assess:


1-1-2323

Questions one might ask:Questions one might ask:

Would an investment generate Would an investment generate attractive returns?attractive returns?

What is the degree of risk What is the degree of risk inherent in the investment?inherent in the investment?

Should existing investing Should existing investing holdings be liquidated?holdings be liquidated?


1-1-2424

Questions one might askQuestions one might ask (cont.)(cont.) Will cash flows be sufficient to Will cash flows be sufficient to

service interest and principal service interest and principal payments on debt?payments on debt?

Does company provide a good Does company provide a good opportunity for employment?opportunity for employment?


1-1-2525

Questions one might ask Questions one might ask (cont.)(cont.) How well does this company How well does this company

compete in its operating compete in its operating environment?environment?

Is this firm a good prospect as Is this firm a good prospect as a customer?a customer?


1-1-2626

Missing and Missing and Hard-to-Find InformationHard-to-Find Information

Employee relations with Employee relations with managementmanagement

Morale/efficiency of employeesMorale/efficiency of employees Reputation/public perceptions Reputation/public perceptions

of firmof firm

Not available in the financial statements:


1-1-2727

Missing andMissing and Hard-to-Find InformationHard-to-Find Information (cont.)(cont.) Effectiveness of management Effectiveness of management

team/provisions for successionteam/provisions for succession Potential exposure to Potential exposure to

regulatory changesregulatory changes

QUALITIES THAT IMPACT QUALITIES THAT IMPACT OPERATING SUCCESS BUT ARE OPERATING SUCCESS BUT ARE

DIFFICULT TO QUANTIFY DIFFICULT TO QUANTIFY


1-1-2828

Missing and Missing and Hard-to-Find Information Hard-to-Find Information (cont.)(cont.)

Affects public perception of firm Affects public perception of firm and can impact financial and can impact financial performanceperformance

Proven correlation between Proven correlation between financial returns and reputationfinancial returns and reputation

A recent example of adverse A recent example of adverse publicity is Enron for denying their publicity is Enron for denying their involvement in any wrongdoing involvement in any wrongdoing

Publicity in the Media


1-1-2929

Complexities-1Complexities-1

Accounting choices and estimatesAccounting choices and estimates Management judgment- accrual basis Management judgment- accrual basis

of accountingof accounting Complex merger&acquisition Complex merger&acquisition

transactionstransactions GoodwillGoodwill ConsolidationConsolidation

Use and accounting for derivativesUse and accounting for derivatives Foreign OperationsForeign Operations


1-1-3030

Complexities-2Complexities-2

Complexity of GAAP (i.e. IFRS)Complexity of GAAP (i.e. IFRS) Frequent change in GAAPFrequent change in GAAP


1-1-3131

Quality of Financial Quality of Financial Reporting (Earnings)Reporting (Earnings)

Persistence (Sustainability)Persistence (Sustainability) Predictability (ability of past Predictability (ability of past

earnings to predict future earnings to predict future earnings)earnings)

Closeness to cashCloseness to cash


1-1-3232

Earnings ManagementEarnings Management

Approach Total Increase DecreaseNo Clear

EffectExpenses and Other Losses 52% 49% 42% 9%Revenue and Other Gains 22% 75% 18% 7%Business Combinations 13% 18% 33% 49%Other Approaches 13% 63% 6% 31%

Current Period Income EffectSummary of Earnings Management Approaches

A survey study carried out in 1998. Based On 253 response of senior auditors. Identified 515 attempts of earnings management.

•Nelson, Elliot and Tarpley (2003), How are Earnings Managed?, Accounting Horizons

(c) 2007 prentice hall, inc.1-1 financial statements an overview mapormaze

Documents

prentice hall

gaap slide

financial statement

financial statement

companys financial statements

basic financial statements

financial analysis

financial structure