Communicating and Interpreting Accounting Information

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Chapter 5

• Communicating and InterpretingAccounting
  Information

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Players in the Accounting Communication Process
Management Preparation CFO, CEO, Accounting
Staff Guided by GAAP
Independent Auditors Verification Partners,
Managers, Staff Guided by GAAS
Government Regulators Verification SEC
Members Guided by SEC regs.
Information Intermediaries Analysis and
Advice Financial analysis, Information services
Users Analysis and Decision Investors, Lenders,
etc.
Public companies only
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Guiding Principles for Communicating Useful
Information
Primary Objective of External Financial Reporting
To provide economic information to external
users for decision making.
Primary Qualitative Characteristics Relevance
Timely and Predictive and Feedback
Value Reliability Accurate, Unbiased, and
Verifiable
Secondary Qualitative Characteristics Comparabilit
y Across businesses Consistency Over time
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Annual Reports

• For privately held companies, annual reports are
  simple documents that include
• Four basic financial statements.
• Related footnotes.
• Report of independent accountants (auditors
  opinion).

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Annual Reports - Financial Section

• Summarized financial data for 5- or 10-years.
• Management Discussion and Analysis (MDA).
• The four basic financial statements.
• Notes (footnotes).
• Independent Accountants Report.

• Recent stock price information.
• Summaries of the unaudited quarterly financial
  data.
• Lists of directors and officers of the company
  and relevant addresses.

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Quarterly Reports

• Usually begin with short letter to stockholders,
• Condensed unaudited income statement and balance
  sheet for the quarter.
• Often, cash flow statement and statement of
  stockholders equity are omitted. Some notes to
  the financial statements also may be omitted.

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SEC Reports

• Form 10-K Annual Report
• To be due within 60 days of the fiscal year-end
• Contains audited financial statements

• Form 10-Q Quarterly Report
• To be due within 35 days of the end of the
  quarter
• Financial statements can be unaudited

• Form 8-K Current Report
• Due within 5 days of the major event date
• Financial statements can be unaudited

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Classified Income Statement Multi-Step Format
General Format for the Classified Income Statement
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In the single-step format, all revenues, income,
and gains are listed first. Costs, expenses, and
losses are then subtracted from total revenues to
get net income.
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Classified Income Statement

• Income statements may contain five sections
• Continuing operations
• Discontinued operations
• Extraordinary items
• Cumulative effect of changes in accounting
  methods
• Earnings per share

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Discontinued Operations
Sale or abandonment of a segment of a business.
Income or loss on segments operation for the
period.
Gain or loss on disposal of the segment.
Show net of applicable taxes.
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Extraordinary Items
Unusual
Infrequent
Show net of applicable taxes.
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Cumulative Effect of Changes in Accounting Methods
GAAP Method
GAAP Method
The change must be to a preferable method and
must be disclosed in notes to financial
statements.
Show net of applicable taxes.