Solutions Manual for Financial Reporting for Managers A Value Creation Perspective 1st Edition by Pratt and Hirst TEXT/LECTURE OUTLINE Value Creation, Financial Statements, and the Environment of Financial Reporting I Value Creation and Successful Management II Value Creation Through Operating, Investing and Financing Activities A Return on Equity B A Caution About Measures of Value Creation C Estimating the Cost of Equity – An Intuitive Approach D Demand for independent audit E Martin and the CPA: different incentives III The Financial Statements – An Introduction A Balance sheet Assets Liabilities Shareholders’ equity a Common stock b Retained earnings B Statement of cash flows Operating activities Investing activities Financing activities C Income statement Revenues Expenses Net income D Statement of shareholders’ equity – retained earnings and dividends IV The economic context in which financial reports are prepared and used A Key elements of the financial accounting environment Providers of capital a) Equity investors 2 Chapter (1) Equity investors purchase ownership shares (i.e., equity) in a company (2) Equity investors are most interested in acquiring information about a company's earning power b) Debt investors (1) Debt investors loan capital to a company (2) Debt investors are most interested in acquiring information about a company's solvency position B Managers Contracts a) Debt contracts b) Compensation contracts Financial accounting statements Independent auditors Legal liability Ethics and professional reputation Reporting entities and industries Consolidated financial statements Subsidiaries Industries a Manufacturing b Retailing c Services d SIC codes V Corporate governance A B C Financial information users and capital markets 1) Equity investors 2) Debt investors 3) Management and other users 4) Capital markets Contracts 1) Debt covenants 2) Management compensation Regulations and standards 36 Chapter D 1) SEC 2) GAAP 3) Politics of Standard Setting Independent auditors 1) “Big Four” 2) Regional and local firms 3) Public Company Accounting Oversight Board (PCAOB) E Board of directors and audit committee F Legal liability G Professional reputation and ethics H Sarbanes-Oxley Act (2002) 1) Certification by principal executive and financial officers 2) Additional responsibilities on management to assure adequate internal control 3) Annual report by management on internal controls over financial reporting VI Global Perspective: Movement Toward a Global Financial Reporting System VII Appendix 1A Estimating the Cost of Equity LECTURE TIPS Students often expect accounting to be a boring “cookbook” course Discussion of Chapter can set the tone for the rest of the course through a relevant, interesting discussion of the economics of accounting and an early introduction of real world examples Although students usually understand the motives underlying the economic consequences arguments, they often not apply these motives to accounting Appendix A Time Value of Money TEXT/LECTURE OUTLINE I Interest: The Price of Money 4 Chapter II Time Value: Size of Time Value III Time Value Computations A B Future value Future value—simple interest Future value—compound interest Future value—table factors Future value—annuities a Ordinary annuity b Annuity due Present value IV Equivalent Value V Computing Implicit Rates of Return and Interest Rates VI Time Value of Money and Financial Reporting VIII Tables A Table A-1: future value of $1 (future amount of a single sum) B Table A-2: future value of an ordinary annuity of $1 C Table A-3: future value of an annuity due of $1 D Table A-4: present value of $1 (present value of a single sum) E Table A-5: present value of an ordinary annuity of $1 F Table A-5: present value of an annuity due of $1 IX Cases and Review Questions LECTURE TIPS The concept of future value is not used much in accounting The present value concept should be emphasized The future value concept is mostly useful to distinguish it from the present value concept 56 Chapter Students often understand the difference between the ordinary annuity and the annuity due better after they have attempted to reconstruct the first few lines of tables A-5 and A-6 using an excel spreadsheet Most students need to work with several examples before they will be able to select the right table when applying these concepts