Accounting Principles and Concepts ppt

Accounting Principles and Concepts Sharon Z. Weiss, Esq. Professor David East, Esq. Andrea Hartley, Esq. Doneene Damon, Esq. Chuck Carroll, CPA Presented to: American Bar Association April 10, 2008 2 Objectives To provide a basic understanding of  Key accounting concepts  Financial statements (what are they?)  Financial statement analysis techniques  Regulatory governance  Auditor reports  Ratio analysis  Putting financial statements to use  Hot Topics (e.g., Sarbanes-Oxley) 3 Key Accounting Concepts 4 Accounting is the identification, measurement, and communication of financial information about economic entities to interested parties. Source: Kieso, Donald E. and Jerry J. Weigandt, Intermediate Accounting. Eighth Edition. 1995 NewYork: John Wiley & Sons Accounting What is Accounting? 5 Accounting Key Concepts Conservatism Historical Cost Basis Consistency Substance Over Form Going Concern Materiality Periodic Reporting Accrual Basis 6 Accounting Elements to Accounting Systems • ASSETS Resources with monetary value • LIAIBILITIES Creditors’ claims on assets • OWNERS’ EQUITY Owners’ and/or stockholders’ claims against assets • REVENUES Income from sales and other sources • EXPENSES Costs to company 7 Financial Statements 8 Financial Statements Definition “The term ‘financial statement’ refers to a presentation of financial data, including accompanying notes, derived from accounting records and intended to communicate an entity’s economic resources or obligations at a point in time or the changes therein for a period of time in conformity with a comprehensive basis of accounting.” Source: AICPA Codification of Statements on Auditing Standards, AU §623 9 Financial Statements Primary SEC Filings for Public Companies Form 10-K • Contains annual financial statements • Must be audited • Other company disclosures and information Form 10-Q • Contains quarterly financial statements • Must be reviewed, not to form an opinion, but to look for anomalies in the data • Other company disclosures and information 10 Financial Statements Overview of Financial Statements Financial Accounting Standards Board (FASB) states that a full set of financial statements should include: • BALANCE SHEET Financial position at the end of the period • STATEMENT OF INCOME Income for the period • STATEMENT OF CASH FLOWS Cash flows for the period • STATEMENT OF CHANGES IN EQUITY Investments by and distributions to owners during the period • FOOTNOTES Adequate disclosures to understand the financial statements [...]... Statement of Cash Flows ($ amts in thousands) Operations Net earnings Depreciation and amortization In-process research and development Increase in deferred taxes Accounts receivable reserves Increase in accounts receivable Decrease (increase) in inventories Accounts payable and accrued liabilities Decrease in other current and non-current assets Increase in other current and non-current liabilities Net cash... cash due to the purchase and sales of PP&E and other investment instruments • Financing Discloses the inflows and outflows of cash due to the retirement and receipt of debt Financial Statements Footnotes Footnotes disclose financial information not contained in the basic financial statements but still required by GAAP Common Disclosures: • • • • • • • • • Accounting policies and methods Description... to fully understand the Financial Statements 26 Regulatory & Auditor Reports 27 Regulatory Who Sets The Rules? Financial Reporting & Disclosure • Financial Accounting Standards Board (FASB) • Securities and Exchange Commission (SEC) Auditing & Professional Standards • Before Sarbanes-Oxley Act (2002): American Institute of Certified Public Accountants (AICPA) • Now: Public Company Accounting Oversight... financing Net change in cash and equivalents 25 12/31/00 $ 4,800 1,515 54 (167) 33 (451) 125 57 143 454 6,563 (1,646) 161 (68) (5,383) 4,670 (102) (2,368) (1,724) (973) 814 (1,485) 4 (28) 292 (3,100) 1,095 Objective: To classify and report cash receipts and payments Three Sections: • Operating Discloses the inflows and outflows of cash due to operations • Investing Discloses the inflows and outflows of cash... Statements Balance Sheet ($ amts in thousands) Balance Sheet Assets Current assets: Cash Marketable securities Accounts Receivable, net Inventories Deferred taxes on income Deposits and prepaid expenses Total current assets Marketable securities Property, plant, and equipment Intangible assets Deferred taxes on income Other assets, net Total assets Liabilities and stockholders' equity Current liabilities:... Measures ability to continue operations and pay obligations Leverage • Measures capital structure and ability to obtain financing *See handout “Ratio Analysis” for examples of specific ratios 33 Financial Statement Analysis Comparisons Trend Analysis • Comparison for same company using different periods Comparative Analysis • Comparative analysis to similar companies and/ or industry Common-type Analysis... stockholders' equity Current liabilities: Accounts payable Accrued liabilities Loans and notes payable Accrued salaries, wages and commissions Taxes on income Total current liab ilities Long-term debt Deferred tax liability Employee related obligations Other liabilities Total liab ilities Stockholders' equity: Common stock and paid-in capital Note receivable from stock ownership plan Accumulated other comprehensive... stockholders' equity Total liabilities and stockholders' equity 12 12/31/2000 $3,411 $2,333 $4,464 $2,842 $1,151 $1,249 $15,450 $269 $6,971 $7,256 $54 $1,321 $31,321 $2,083 $2,776 $1,479 $488 $314 $7,140 $2,037 $255 $1,753 $1,328 $12,513 $1,535 ($35) ($470) $18,812 ($1,034) $18,808 $31,321 Balance Sheet Objective: • To provide reliable information about a company’s economic resources and obligations • A snapshot... expenses Gross profit Operating O, F, & T expenses expenses Net profit Net loss Financial Statements Income Statement Income Statement ($ amts in thousands) Sales Revenue Operating expenses: Cost of goods sold Gross Profit 12/31/00 $29,139 Sales, marketing, and administrative expenses Research expense In-process research & development Interest income Interest expense Other expense, net Restructuring charge... share will also be reported here Income Statement Equation: Revenues – Expenses = Net Income *See handout “Income Statement Components” for further details Financial Statements Income Statement $2.50 Earnings per Share (EPS) • Calculated by dividing Net Income (Earnings) by shares of common stock outstanding • Small fluctuations in EPS may have a large impact on stock price EPS $2.00 $1.50 $1.00 $0.50 . E. and Jerry J. Weigandt, Intermediate Accounting. Eighth Edition. 1995 NewYork: John Wiley & Sons Accounting What is Accounting? 5 Accounting Key Concepts Conservatism Historical. Accounting Principles and Concepts Sharon Z. Weiss, Esq. Professor David East, Esq. Andrea Hartley, Esq. Doneene Damon,