McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5
Financial Reporting and Analysis
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Fred Phillips, Ph.D., CA
Accounting Fraud
Incentive
(Why?)
The
Fraud
Triangle
Opportunity
(How?)
5-3
Character
(Who?)
The Sarbanes-Oxley (SOX) Act
Counteract
Incentives
SOX
Reduce
Opportunities
5-4
Encourage
Good
Character
Financial Reporting in the U.S.
Enhance
financial
statement
format
Fiscal
Year End
Obtain
independent
external
audit
Release
additional
financial
information
Preliminary
Release of
Key Results
Final
Release of
Annual
Report
Independent External Audit
Financial Statement Preparation
March 31,
2008
5-5
May 8,
2008
May 30,
2008
Comparative Financial Statements
ACTIVISION, INC.
Balance Sheet
(in millions of U.S. dollars)
March 31,
2008
Assets
Current Assets
Cash
Short-Term Investments
Accounts Receivables
Inventories
Other Current Assets
Total Current Assets
Property and Equipment, net
Other Noncurrent Assets
Goodwill
Total Assets
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable
Accrued and Other Liabilities
Total Current Liabilities
Other Noncurrent Liabilities
Total Liabilities
Stockholders' Equity
Contributed Capital
Retained Earnings
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
5-6
$
$
$
$
March 31,
2007
1,396 $
53
203
147
180
1,979
55
217
279
2,530 $
384
570
149
91
207
1,401
47
151
195
1,794
130 $
426
556
26
582
136
205
341
41
382
1,175
773
1,948
2,530 $
984
428
1,412
1,794
A comparative
format reveals
changes over
time, such as
Activision’s huge
increase in Cash
and decline in
Short-term
Investments.
Multistep Income Statements
ACTIVISION, INC.
Income Statement
(in millions of U.S. dollars)
Year Ended March 31,
2008
2007
Sales and Service Revenues
$
2,898 $
1,513 $
Expenses
Cost of Sales
1,645
979
Research and Development
270
133
Marketing and Sales
308
196
General and Administrative
195
132
Total Operating Expenses
2,418
1,440
Income from Operations
480
73
Revenue from Investments
51
37
Income before Income Tax Expense
531
110
Income Tax Expense
186
24
Net Income
$
345 $
86 $
5-7
2006
1,468
942
132
283
96
1,453
15
31
46
6
40
Statement of Stockholders’ Equity
ACTIVISION, INC.
Statement of Stockholders' Equity
For the Year Ended March 31, 2008
(in millions of U.S. dollars)
Contributed Retained
Capital
Earnings
Balances at March 31, 2007
$
984 $
428
Net Income
345
Dividends Declared
Issued Shares of Stock
191
Repurchased Shares of Stock
Balances at March 31, 2008
$
1,175 $
773
5-8
Independent External Audit
Auditors are Certified Public Accounts who are
independent of the company.
5-9
Unqualified
Audit Opinion
Qualified
Audit Opinion
Financial
statements are
presented in
accordance with
GAAP
Financial
statements fail to
follow GAAP or not
able to complete
needed tests
Securities and Exchange
Commission (SEC) Filings
Public companies are required to electronically
file certain reports with the SEC, including Form
10-K, Form 10-Q, and Form 8-K.
SEC Filing
Description
Form 10-K Annual filing of financial information
Form 10-Q Quarterly filing of financial information
Form 8-K Reports significant business events
5-10
Globalization and IFRS
International Financial Reporting Standards
(IFRS) are accounting rules established by the
International Accounting Standards Board for
use in over 100 countries around the world.
In 2008, the SEC announced a plan to allow
some U.S. companies to use IFRS in 2009 and
could require mandatory use of IFRS
starting in 2014.
5-11
IFRS Formatting of Financial
Statements
5-12
A side-by-side
comparison of a
balance sheet
prepared using
GAAP and a
statement of
financial position
prepared using
IFRS.
5-13
Comparison to Common
Benchmarks
To help interpret amounts on the financial
statements, it’s useful to have points of
comparison or “benchmarks.”
5-14
Prior Periods
Competitors
Time series analysis
compares a company’s
results for one period to
its own results over a
series of time periods.
Cross-sectional analysis
compares the results of
one company with those
of others in the same
section of the industry.
A Basic Business Model
Most businesses can be broken down into 4 elements:
(1) Obtain financing from lenders and investors, which is used to
invest in assets,
(2) Invest in assets, which are used to generate revenues,
(3) Generate revenues, which produce net income,
(4) Produce net income, which is needed to satisfy lenders and
investors.
(2) Assets
generate
(3) Revenues
Investing
(1) Debt & Equity
Financing
5-15
Financing
Operating
(4) Net Income
Financial Statement Ratios
In addition to making it possible to compare
companies of different sizes, a benefit of ratio
analysis is that it enables comparisons between
companies reporting in different currencies
(dollars vs. euros).
5-16
End of Chapter 5