Kế toán, kiểm toán - Chapter 3: The balance sheet and financial disclosures

The Balance Sheet and Financial Disclosures3 Learning ObjectivesDescribe the purpose of the balance sheet and understand its usefulness and limitations.LO1The Balance SheetLimitations:The balance sheet does not portray the market value of the entity as a going concern nor its liquidation value.Resources such as employee skills and reputation are not recorded in the balance sheet.Usefulness:The balance sheet describes many of the resources a company has available for generating future cash flows.It provides liquidity information useful in assessing a company’s ability to pay its current obligations.It provides long-term solvency information relating to the riskiness of a company with regard to the amount of liabilities in its capital structure.The purpose of the balance sheet is to report a company’s financial position on a particular date.Resources (Assets)Claims against resources (Liabilities)Remaining claims accruing to owners (Owners’ Equity)Balance SheetLearning ObjectivesDistinguish between current and noncurrent assets and liabilities.LO2Identify and describe the various balance sheet asset classifications.LO3Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. CashCash EquivalentsShort-term InvestmentsReceivablesInventoriesPrepaymentsCurrent AssetsWill be converted to cash or consumed within one year or the operating cycle, whichever is longer.Current AssetsCash equivalents include certain negotiable items such as commercial paper, money market funds, and U.S. treasury bills.Current AssetsWill be converted to cash or consumed within one year or the operating cycle, whichever is longer.Cash that is restricted for a special purpose and not available for current operations should not be classified as a current asset.CashCash EquivalentsShort-term InvestmentsReceivablesInventoriesPrepaymentsCurrent AssetsOperating Cycle of a Typical Manufacturing CompanyUse cash to acquire raw materialsConvert raw materials to finished productDeliver product to customerCollect cash from customer1234Noncurrent AssetsInvestments and FundsProperty, Plant, & EquipmentIntangiblesOtherNot expected to be converted to cash or consumed within one year or the operating cycle, whichever is longerNoncurrent AssetsNoncurrent AssetsOther AssetsIncludes long-term prepaid expenses and any noncurrent assets not falling in one of the other classificationsInvestments and FundsNot used in the operations of the businessIncludes both debt and equity securities of other corporations, land held for speculation, noncurrent receivables, and cash set aside for special purposesProperty, Plant and EquipmentAre tangible, long-lived, and used in the operations of the businessIncludes land, buildings, equipment, machinery, and furniture as well as natural resources such as mineral mines, timber tracts, and oil wellsReported at original cost less accumulated depreciation (or depletion for natural resources)Intangible AssetsUsed in the operations of the business but have no physical substanceIncludes patents, copyrights, and franchisesReported net of accumulated amortization©Learning ObjectivesIdentify and describe the two balance sheet liability classifications.LO4Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities as a result of past transactions or events. Current LiabilitiesAccounts PayableNotes PayableAccrued LiabilitiesCurrent Maturities of Long-Term DebtObligations expected to be satisfied through current assets or creation of other current liabilities within one year or the operating cycle, whichever is longerCurrent LiabilitiesLong-term LiabilitiesNotes PayableMortgagesBonds PayablePension ObligationsLease ObligationsObligations that will not be satisfied within one year or operating cycle, whichever is longerLong-Term LiabilitiesShareholders’ Equity is the residual interest in the assets of an entity that remains after deducting liabilities. Shareholders’ EquityCapital StockRetained EarningsTreasury StockDeferred CompensationAccumulated Other Comprehensive IncomeLearning ObjectivesExplain the purpose of financial statement disclosures.LO5Disclosure NotesSummary of Significant Accounting PoliciesConveys valuable information about the company’s choices from among various alternative accounting methods.Subsequent EventsA significant development that takes place after the company’s fiscal year-end but before the financial statements are issued.Noteworthy Events and TransactionsTransactions or events that are potentially important to evaluating a company’s financial statements, e.g., related parties, errors and irregularities, and illegal acts.Learning ObjectivesExplain the purpose of management’s discussion and analysis.LO6Management Discussion and AnalysisProvides a biased but informed perspective of a company’s operations, liquidity, and capital resources.Management’s ResponsibilitiesPreparing the financial statements and other information in the annual report.Maintaining and assessing the company’s internal control procedures. Learning ObjectivesExplain the purpose of an audit and describe the content of the audit report.LO7Auditors’ ReportExpresses the auditors’ opinion as to the fairness of presentation of the financial statements in conformity with generally accepted accounting principlesMust comply with specifications of the AICPA and the PCAOBAuditors’ OpinionsUnqualifiedIssued when the financial statements present fairly the financial position, results of operations, and cash flows in conformity with GAAPQualifiedIssued when there is an exception that is not of sufficient seriousness to invalidate the financial statements as a wholeAdverseIssued when the exceptions are so serious that a qualified opinion is not justifiedDisclaimerIssued when insufficient information has been gathered to express an opinionCompensation of Directors & Top ExecutivesProxy Statement Information Summary compensation tableTable of options grantedTable of options holdingsA proxy statement is sent each year to all shareholders, usually in the same mailing with the annual report. Learning ObjectivesDescribe the techniques used by financial analysts to transform financial information into forms more useful for analysis.LO8Using Financial Statement InformationComparative Financial StatementsAllow financial statement users to compare year-to-year financial position, results of operations, and cash flowsHorizontal AnalysisExpresses each item in the financial statements as a percentage of that same item in the financial statements of another year (base amount)Vertical AnalysisInvolves expressing each item in the financial statements as a percentage of an appropriate corresponding total, or base amount, within the same year.Ratio AnalysisAllows analysts to control for size differences over time and among firmsLearning ObjectivesIdentify and calculate the common liquidity and financing ratios used to assess risk.LO9Liquidity Ratios=Current ratioCurrent assetsCurrent liabilitiesMeasures a company’s ability to satisfy its short-term liabilities=Acid-test ratioQuick assetsCurrent liabilitiesProvides a more stringent indication of a company’s ability to pay its current liabilitiesLiquidity Ratios—Federal Express= 1.05 $4,970$4,732Current ratio= .86$4,073$4,732Acid-test ratioFinancing Ratios=Debt to equity ratioTotal liabilitiesShareholders’ equityIndicates the extent of reliance on creditors, rather than owners, in providing resources=Times interest earned ratioNet income + Interest expense + TaxesInterest expenseIndicates the margin of safety provided to creditorsFinancing Ratios—Federal Express= 1.38$11,098$8,036Debt to equity ratioTimes interest earned ratio= 10.70$1,455$136 Appendix 3Reporting Segment InformationReporting by Operating SegmentReportable Operating Segment CharacteristicsEngages in business activities from which it may earn revenues and incur expensesMany companies operate in several business segments as a strategy to achieve growth and to reduce operating risk through diversification. Segment reporting facilitates the financial statement analysis of diversified companies.Operating results are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performanceDiscrete financial information is availableWhat Amounts Are Reported By An Operating SegmentGeneral information about the operating segmentSegment profit or loss, segment assets, and the basis of measurementReconciliations of the totals of segment revenues, reported profit or loss, assets, and other significant itemsInterim period informationSegment ReportingReporting by Geographic AreaSFAS 131 requires an enterprise to report certain geographic information unless it is impracticable to do so.Information About Major CustomersRevenues from customers generating 10% or more of the revenue of an enterprise must be disclosed.End of Chapter 3