Transcript Additional Aspects of Financial Reporting and Financial

Chapter 6
Additional Aspects of
Financial Reporting
and Financial Analysis
Intermediate Accounting 10th edition
Nikolai Bazley Jones
An electronic presentation
by Norman Sunderman
Angelo State University
COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation.
Thomson, the Star logo, and South-Western are trademarks used herein under license.
2
Objectives
1.
2.
3.
4.
5.
Describe an auditor’s report.
Explain the disclosure in management’s
discussion and analysis.
Understand the meaning of an operating
segment.
Describe the disclosure in a segment
report.
Explain interim reporting.
3
Objectives
Prepare an interim report.
7. Understand intracompany and
intercompany comparisons (Appendix).
8. Prepare horizontal and vertical
percentage analyses (Appendix).
9. Perform ratio analysis (Appendix).
6.
4
Market Efficiency
Evidence from research on an efficient
market hypothesis tends to show-The prices of
securities traded in
These
prices
are
the capital market
adjusted
almost
fully reflect all
immediately
based
publicly available
on new information
information.
and in an unbiased
manner.
5
Market Efficiency
6
Auditor’s Report (Opinion)
1.
2.
3.
4.
An auditor’s
The auditor is independent.
standard report
these
The audit was performedincludes
on specified
statements...
financial statements.
The financial statements are the
responsibility of the company’s
management; the opinion is the
responsibility of the auditors.
The audit was conducted according to
generally accepted
auditing standards.
Continued
7
Auditor’s Report (Opinion)
The audit was planned and performed to
obtain reasonable assurance about whether
the financial statements are free of material
misstatements.
6. The audit included examination,
assessment, and evaluation stages.
7. The audit provides a reasonable basis for an
opinion.
8. An opinion is expressed concerning the fair
presentation.
5.
8
Auditor’s Report (Opinion)
The first
The second (scope)
(introductory)
paragraph describes what
paragraph lists the
the auditor has done.
financial statements
An unqualified
that were audited,
opinion contains
declares that
management is
3 paragraphs.
The third
responsible for those
(opinion)
statements, and asserts
paragraph
that the auditor is
gives the
responsible for
auditor’s
expressing an opinion
opinion.
on them.
9
Auditor’s Report (Opinion)
An unqualified opinion is not a “clean bill of
health.”
2. An unqualified opinion provides no assurance
of the future success of the company.
3. An audit report does not provide an
assurance that fraud has not been committed
by a member, or members, of the company
unless such fraud would cause a material
misstatement in the financial statements.
1.
10
Management’s Discussion and
Analysis
The MD&A provides a
narrative explanation of the
financial statements so that
investors can judge the
“quality” of earnings and the
likelihood that past
performance is indicative of
future performance in regard
to cash flows.
11
Management’s Discussion and
Analysis
Where knowledge of
The MD&A provides a segment information
narrative explanation of the
is useful to
financial statements so that understanding a
The MD&A provides
investors can judge the company’s business,
information regarding
“quality” of earnings and the the discussion is to
liquidity, capital resources,
likelihood that past
focus on each
and the results of operations,
performance is indicative of relevant, reportable
as well as other information
future performance in regardoperating segment, as
necessary to understand its
to cash flows.
well as on the whole
financial condition and
company.
changes in financial condition.
12
Management’s Discussion and
Analysis
Major discussion issues that may
involve intracompany and
intercompany comparisons.
 Liquidity
 Capital Resources
 Results of Operations
 General Information
13
Disaggregation of Financial
Information
Although investors and creditors know the
importance of consolidated statements in
evaluating overall company performance, the
disaggregation of total financial data also can be
important in their financial analysis.
A company improves the financial analysis
information on risk and return by presenting
disaggregated information on its operating
segments.
14
Segment Reporting
An operating segment is a component of a
company-1.
2.
3.
that engages in business activities to earn
revenues and incur expenses,
whose operating results are regularly reviewed
by the company’s chief operating officer to make
decisions about resources to be allocated to the
segment and to assess its performance, and
for which financial information is available.
15
Segment Reporting
An operating segment is
considered significant and is a
reportable segment if it satisfies at
least one of the following tests:
1. Revenue Test. Its reported
revenues are 10% or more of
the combined revenues of all
the company’s reported
operating segments.
16
Segment Reporting
An operating segment is
considered significant and is a
reportable segment if it satisfies at
least one of the following tests:
2. Profit Test. The absolute
amount of its profit (loss) is
10% or more of the
combined reported profits of
all operating segments that
did not report a loss.
17
Segment Reporting
An operating segment is
considered significant and is a
reportable segment if it satisfies at
least one of the following tests:
3. Asset Test. Its segment
assets are 10% or more of
the combined assets of all
operating segments.
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TEAL COMPANY
Operating Segment Financial Results
See page 256
for Year Ended December 31, 2007
Reportable Operating Segments All Other Total
>10% of total revenues
A
B
C
Segments Results
Segment revenues $ 300
$2,530
$ 370 $ 600 $ 3,800
Segment operating
profit (pretax)
$ 70
$ 495
$ 105 $ 140 $ 810
General corporate
expenses
(100)
Corporate interest
>10% of total profits
expense
(80)
Pretax income from
>10% of total assets
cont’g operations
$ 630
Segment assets at
12/31/2007
$1,800
$9,400
$2,000 $2,800 $16,000
Gen. corp. assets
3,000
Total assets 12/31/2007
$19,000
19
Interim Income Taxes
To fairly present the results of
operations, at the end of each
interim period a company must
make its best estimate of the
effective income tax rate to be
applicable for the entire year.
20
Interim Income Taxes
1. Estimated Annual Income:
First quarter
Second quarter
Third quarter
Fourth quarter
$ 20,000
26,000
25,000
29,000
$100,000
actual income
actual income
estimated income
estimated income
estimated annual income
The tax rates are 15% on the first $20,000 and 30%
on income over $20,000
Continued
21
Interim Income Taxes
2. Estimated Effective Income Tax Rate:
15% x $20,000 = $ 3,000
30% x ($100,000 – $20,000) = 24,000
Estimated total tax for the year = $27,000
27% Effective tax rate =
$27,000 Estimated income tax
$100,000 Estimated Income
Continued
22
Interim Income Taxes
3. Estimated Income Tax for First Six Months:
$46,000 x 27% = $12,420 estimated income tax on
first six months’ income
4. Estimated Income Tax for Second Quarter:
$12,420 estimated income tax on first six months
of income
(5,220 ) estimated income tax on first-quarter
income (using annual estimate at that time)
$ 7,200 estimated income tax on second-quarter
income
Preparation of Disclosure of
Summarized Interim Financial
Data
When publicly held companies
report interim summaries of
financial information, the following
data must be reported at a
minimum.
23
Preparation of Disclosure of
Summarized Interim Financial
Data
Sales or gross revenues,
income taxes,
extraordinary items (net
of tax), the cumulative
effect of a change in
accounting principle, and
net income.
Earnings per share for
each period presented.
Seasonal
revenues, costs,
and expenses.
Contingent items.
Significant
changes in
financial position.
24
Preparation of Disclosure of
Summarized Interim Financial
Data
Sales or gross revenues,
Seasonal
income taxes, Significant
revenues, costs,
extraordinary itemschanges
(net
in
and expenses.
of tax), the cumulative
estimates of
effect of a change
in
income
taxes.
Contingent items.
accounting principle, and
net income. Changes in
accounting
Significant
principles
or
Earnings per share for
changes in
estimates.
each period presented.
financial position.
25
26
Interim Statements
For interim income statements for the
second and third quarters:
1. Present the “year to date” income
statement,
2. Deduct the amounts for each account
from the previous quarter’s statement,
3. Present an income statement for the
current quarter in the adjoining column
27
SEC Reports
Two SEC forms that
are important to
accountants are--
Form 10-K
Form 10-Q
28
SEC Reports
Form 10-K is the most
common SEC annual report
form and is required to be
filed with the SEC within 60
days of a company’s fiscal
year-end.
29
SEC Reports
Form 10-Q is used to report a
company’s quarterly financial
information to the SEC and is
required to be filed within 40
days of the end of the company’s
first three fiscal quarters in 2005
and within 35 days after
December 15, 2006.
30
Financial Analysis Comparison
Financial
Analysis
Comparisons
Horizontal
Vertical
Ratio
Intracompany
Intercompany
Percentage
Analyses
31
Horizontal Analysis
In horizontal analysis,
changes in a company’s
operating results and financial
position over time are shown in
percentages as well as in
dollars.
32
Horizontal Analysis
Now, using data from
Example 6-3 on page
266, let’s examine
Sales
Sales from December
31, 2007 to December
31, 2008.
%=
12/31/08
$138,000
12/31/07
$130,000
$8,000
 from 12/31/07 to 12/31/08
Base Year
$8,000
= 6.2%
%=
$130,000
33
Horizontal Analysis
Again using data from
Example 6-3, let’s
12/31/08
12/31/06
calculate the change in
Grossfrom
profit
$55,900
$42,000
gross profit
December 31, 2006 to
December 31, 2008.
$13,900
 from 12/31/06 to 12/31/08
%=
Base Year
$13,900
= 33.1%
%=
$42,000
34
Vertical AnalysisIncome Statement
In vertical analysis, the monetary
relationships between items on the
financial statements are shown in
percentages as well as in dollars.
35
Vertical AnalysisIncome Statement
2008
Sales
Sales returns
Sales, net
Cost of goods sold
Gross profit
Amount
Percent
$138,000
(8,000)
$130,000
(74,100)
$ 55,900
106.2
Sales, $138,000
Sales, net, $130,000
= 106.2
100.0
36
Vertical AnalysisIncome Statement
2008
Sales
Sales returns
Sales, net
Cost of goods sold
Gross profit
Amount
Percent
$138,000
(8,000)
$130,000
(74,100)
$ 55,900
106.2
(6.2)
100.0
Sales returns, ($8,000)
Sales, net , $130,000
= (6.2)%
37
Vertical AnalysisIncome Statement
2008
Sales
Sales returns
Sales, net
Cost of goods sold
Gross profit
Amount
Percent
$138,000
(8,000)
$130,000
(74,100)
$ 55,900
106.2
(6.2)
100.0
(57.0)
Cost of goods sold, ($74,100)
Sales, net , $130,000
= (57.0)%
38
Vertical AnalysisIncome Statement
2008
Sales
Sales returns
Sales, net
Cost of goods sold
Gross profit
Amount
Percent
$138,000
(8,000)
$130,000
(74,100)
$ 55,900
106.2
(6.2)
100.0
(57.0)
43.0
Gross profit, $55,900
Sales, net , $130,000
= 43.0%
39
Vertical AnalysisBalance Sheet
2008
Amount
Cash
Receivables (net)
Inventories
Prepaid Items
Total current assets
Noncurrent assets (net)
Total Assets
Cash, $3,900
$
3,900
7,600
8,900
1,000
$ 21,400
107,800
$129,200
Total Assets, $129,200
= 3.0%
Percent
3.0
100.0
40
Vertical AnalysisBalance Sheet
2008
Amount
Percent
Cash
$ 3,900
3.0
5.9
Receivables (net)
7,600
Inventories
8,900
Prepaid Items
1,000
Total current assets
$ 21,400
Noncurrent assets (net)
107,800
Total Assets
$129,200
100.0
Receivables (net), $7,600
= 5.9%
Total Assets, $129,200
41
Vertical AnalysisBalance Sheet
Using this approach
on the rest of the
assets, this section
can be completed.
42
Vertical AnalysisBalance Sheet
2008
Amount
Cash
Receivables (net)
Inventories
Prepaid Items
Total current assets
Noncurrent assets (net)
Total Assets
$
3,900
7,600
8,900
1,000
$ 21,400
107,800
$129,200
Percent
3.0
5.9
6.9
.8
16.6
83.4
100.0
43
Vertical AnalysisBalance Sheet
In calculating vertical
analysis amounts for
liabilities and stockholders’
equity, all items are divided
by “total liabilities and
stockholders’ equity.”
Accounts Payable, $5,000
Total L& SE, $129,200
= 3.9%
44
Cooper Company
Income Statement 2008
Sales
Sales returns
Net sales (70% on credit)
Cost of goods sold
Gross profit
Selling expenses
General expenses
Interest expenses
Pretax continuing income
Income tax expense
Net income
$138,000
8,000
$130,000
74,100
$55,900
$14,900
22,300
3,000
40,200
$15,700
4,700
$11,000
Cooper Company
Retained Earnings Statement
2008
Beginning retained earnings
Net income
Preferred dividends, $8 per share
Common dividends, $1 per share
Ending retained earnings
$32,000
11,000
$43,000
(1,200)
(5,400)
$36,400
45
46
Cooper Company
Comparative Balance Sheets
Cash
Receivables (net)
Inventories
Prepaid items
Total current assets
Noncurrent assets (net)
Total assets
2008
$3,900
7,600
8,900
1,000
$21,400
107,800
$129,200
Continued
2007
$4,800
8,600
10,100
1,200
$24,700
87,300
$112,000
47
Cooper Company
Comparative Balance Sheets
2008
2007
Accounts payable
$5,000
$6,600
Other current liabilities
6,200
6,400
Long term liabilities
25,000
20,000
Total liabilities
$36,200 $33,000
Preferred stock, 8%, $100 par
15,000
15,000
Common stock, $5 par
27,000
24,000
Additional paid in capital
14,600
8,000
Retained earnings
36,400
32,000
Total stockholders’ equity
$93,000 $79,000
Total liabilities & stockholders’ equity$129,200 $112,000
The market price of the common stock was $14.25 on Dec. 31, 2008
48
Continue using
Cooper Company
information on
previous slides and
on pages 267-268
49
Ratio Analysis
Stockholders’ Profitability Ratios
Earnings per share is probably the
most frequently cited ratio in a financial
analysis.
Net Income - Preferred Dividends
Average Common Shares
Outstanding
50
Ratio Analysis
Stockholders’ Profitability Ratios
Earnings per share is probably the
most frequently cited ratio in a financial
analysis.
$11,000
5,400
= $1.81
$1,200
51
Ratio Analysis
Stockholders’ Profitability Ratios
Price/earnings is used by actual and potential
stockholders to evaluate the attractiveness of
an investment in the stock of a company.
Market Price per Common Share
Earnings per Share
52
Ratio Analysis
Stockholders’ Profitability Ratios
Price/earnings is used by actual and potential
stockholders to evaluate the attractiveness of
an investment in the stock of a company.
$14.25
$1.81
= 7.9 times
53
Ratio Analysis
Stockholders’ Profitability Ratios
Dividend yield provides the stockholders’ their
individual rates of return based on the actual dividends
received as compared with the ending market price of
the stock.
Dividends per
Common Share
$1.00
Market Price$14.25
per Common Share
= 7.0%
54
Ratio Analysis
Company Profitability Ratios
Profit margin is used to evaluate a
company’s efficiency in controlling
costs and expenses in relation to sales.
Net Income
Net Sales
55
Ratio Analysis
Company Profitability Ratios
Profit margin is used to evaluate a
company’s efficiency in controlling
costs and expenses in relation to sales.
$11,000
$130,000
= 8.5%
56
Ratio Analysis
Company Profitability Ratios
Return on total assets indicates how efficiently a
company uses its economic resources.
Net Income + Interest Expense
(net of tax)
Average Total Assets
57
Ratio Analysis
Company Profitability Ratios
Return on total assets indicates how efficiently a
company uses its economic resources.
$11,000 + ($3,000 x 0.7)
($129,200 + $112,000)/2
= 10.9%
58
Ratio Analysis
Company Profitability Ratios
Return on stockholders’ equity shows the
residual returns on the owners’ equity.
Net Income
Average Stockholders’ Equity
59
Ratio Analysis
Company Profitability Ratios
Return on stockholders’ equity shows the
residual returns on the owners’ equity.
$11,000
($93,000 + $79,000)/2
= 12.8%
60
Ratio Analysis
Liquidity Ratios
The current ratio is used to evaluate a
company’s short-run liquidity.
Current Assets
1.
Current Liabilities 2.
3.
4.
5.
Cash
Short-term investments
Accounts receivable
Inventory
Prepaid expenses/supplies
61
Ratio Analysis
Liquidity Ratios
The current ratio is used to evaluate a
company’s short-run liquidity.
$21,400
$11,200
= 1.91 times
62
Ratio Analysis
Liquidity Ratios
The acid-test ratio is a more severe test of
a company’s short-term debt-paying
abilities.
Quick Assets
1. Cash
Current Liabilities 2. Short-term investments
3. Accounts receivable
63
Ratio Analysis
Liquidity Ratios
The acid-test ratio is a more severe test of
a company’s short-term debt-paying
abilities.
$11,500
$11,200
= 1.03 times
64
Ratio Analysis
Activity Ratios
Inventory turnover indicates the
number of times the inventory is “turned
over” or sold during that period.
Cost of Goods Sold
Average Inventory
65
Ratio Analysis
Activity Ratios
Inventory turnover indicates the
number of times the inventory is “turned
over” or sold during that period.
$74,100
($8,900 + $10,100)/2
= 7.8 times or 47 days
365
7.8
66
Ratio Analysis
Activity Ratios
Receivables turnover indicates how
many times receivables are “turned
over” or collected each period.
Net Credit Sales
Average Net Receivables
67
Ratio Analysis
Activity Ratios
Receivables turnover indicates how
many times receivables are “turned
over” or collected each period.
Net
Creditx Sales
$130,000
0.70
Average
Receivables
($7,600Net
+ $8,600)/2
= 11.2 times or 33 days
365
11.2
68
Ratio Analysis
Activity Ratios
The payables turnover ratio measures
the number of times accounts payable
turns over during the year.
Cost of Goods Sold
Average Accounts Payable
69
Ratio Analysis
Activity Ratios
The payables turnover ratio measures
the number of times accounts payable
turns over during the year.
Cost of
Goods Sold
$74,100
Average
Accounts
Payable
($5,000
+ $6,600)/2
= 12.8 times or 29 days
365
12.8
70
Ratio Analysis
Stability Ratios
The debt ratio indicates the
percentage of total assets contributed
by creditors.
Total Liabilities
Total Assets
71
Ratio Analysis
Stability Ratios
The debt ratio indicates the
percentage of total assets contributed
by creditors.
Total
Liabilities
$36,200
Total
Assets
$129,200
= 28%
72
Ratio Analysis
Stability Ratios
Times interest earned is used to evaluate
the ability of a company to cover its interest
obligations through its annual earnings.
Pretax Operating Income
Interest Expense
73
Ratio Analysis
Stability Ratios
Times interest earned is used to evaluate
the ability of a company to cover its interest
obligations through its annual earnings.
$15,700 + $3,000
$3,000
= 6.2 times
74
Ratio Analysis
Stability Ratios
Book value per common share
shows the net assets per share of stock.
Common Stockholders’ Equity
Outstanding Common Shares
75
Ratio Analysis
Stability Ratios
Book value per common share
shows the net assets per share of stock.
$93,000 - ($140 x 150)
5,400
=$ 13.33 per common
share
76
Chapter 6
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