unlocking financial statements - day 1
DESCRIPTION
Jimmy Gentry presents "Unlocking Financial Statements - Day 2," a business journalism Webinar for the Donald W. Reynolds National Center for Business Journalism. To learn more about free training for business journalists, please visit businessjournalism.org.TRANSCRIPT
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Online Seminar Day 1
July 18, 2011
UnlockingFinancial
Statements
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Understanding Financial Statements2
An Online Seminar Presented By
The Donald W. Reynolds National Center
For Business Journalism
At Arizona State University
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Understanding Financial Statements3
Presented By
James K. Gentry, Ph.D. Clyde M. Reed Teaching Professor School of Journalism and Mass Communication University of Kansas [email protected]
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Schedule for Week Day 1: Introduction to financial
statements Day 2: Income statement Day 3: Balance sheet Day 4: Cash flows Day 5: Beyond the basics
Understanding Financial Statements4
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Understanding Financial Statements5
Introduction
To Financial Statements
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Understanding Financial Statements6
Types of Companies Public Private
Financial statements conforming to public company statements
Non-profits
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Understanding Financial Statements7
Important Terms Unaudited Audited Accountants Certified Public Accountants (CPAs) GAAP, FASB, AICPA, PCAOB
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Understanding Financial Statements8
Sarbanes-Oxley Act of 2002 Response to abuses with Enron and
WorldCom as catalysts New responsibilities and resources for
SEC Created PCAOB Major emphasis on “internal controls” More disclosure for public companies
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Understanding Financial Statements9
Sarbanes-Oxley Act Analysts must disclose potential conflicts of
interest Limited types of services accounting firms
can provide to public company clients CEO, CFO attest to accuracy, completeness,
fairness of financial statements Rigorous penalties for fraud, other misdeeds
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Understanding Financial Statements10
Public Company Accounting Oversight Board Created by SOX to oversee accounting SEC appoints members to five-year terms Five full-time members including a chairman Two must be or have been CPAs All members must be “financially literate” Began operating May 2003
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Key SEC Documents 10-K 10-Q 8-K Proxy statement Prospectus
Understanding Financial Statements11
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Annual Report (or 10-K) Strategy
Auditor’s report Management’s
discussion and analysis
Understanding Financial Statements12
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Annual Report (or 10-K) Strategy (cont.)
Financial statements and footnotes
Management’s letter if annual report
Understanding Financial Statements13
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Understanding Financial Statements14
Basic Auditor’s Report Independent auditor’s opinion on whether
financial statements are presented fairly in all material respects, in accordance with GAAP:
We looked at these statements They’re management’s responsibility; we’re
just here to express our opinion We followed the rules in our audits and here’s
what an audit involves In our opinion, the statements fairly present
the company’s position
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Understanding Financial Statements15
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Understanding Financial Statements16
Auditor’s Report by Category Clean or Unqualified Qualified Disclaimer Adverse
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Understanding Financial Statements17
New Auditor’s Report Combines traditional report with internal
controls requirement of Sarbanes-Oxley Act
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Understanding Financial Statements18
MD&A Must read it Often a source of good information and
insights Densely written SEC says it wants greater transparency
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Understanding Financial Statements19
Goal of Accounting Record, classify and report financial
transactions. To provide managers across the organization with information that facilitates: Control of activities and expenditure Refinement of operational plans Accountability Reporting on project outcomes Writing of bids for new funds
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Understanding Financial Statements20
Goal of Finance Maximize shareholder wealth as
reflected in market price of the stock Achieving this goal requires financial
manager to focus on economic profit, not accounting profit
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Understanding Financial Statements21
Financial Decisions Long-term investment decisions
Capital budgeting Long-term financing decisions
Capital structure Working capital management decisions
Net working capital
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Understanding Financial Statements22
Financial Decisions Investing decisions: Types of assets
firm wants to hold. Financing decisions: Acquisition of
funds needed to support long-term investments.
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Understanding Financial Statements23
Generally Accepted Accounting Principles Guidelines based on theory and
practice Evolved over time Procedures, concepts and standards
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Understanding Financial Statements24
GAAP: Key Points Periodicity Going concern Economic entity Monetary unit Full disclosure
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Understanding Financial Statements25
GAAP: Key Points Historical cost Revenue realization Consistency Materiality Industry practices Conservatism
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Understanding Financial Statements26
Cash or Operating Cycle Cash Purchase inventory Produce product Sell product Cash
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Understanding Financial Statements27
Cash or Operating Cycle (cont.) “Cash”
Cash Receivables Debt
Inventory Raw materials Work in progress Finished goods
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Understanding Financial Statements28
Cash or Operating Cycle (cont.) Sell product
Accounts receivable Cash
Cash Collect receivables as cash
Pay off payables Start over