1. Explain briefly the function of accounting and
describe the two parts of the accounting
information system.
2. Describe briefly the function of generally
accepted accounting principles (GAAP).
3. Recount the goal of the International Accounting
Standards Board and describe why International
Financial Reporting Standards are important to
global business operations.
4. Explain how auditing contributes to the
usefulness of financial reporting.
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15–2
5. Explain how financial statement analysis can be
used to evaluate a company’s financial situation
and compare it to other companies.
6. Describe briefly tax issues that MNCs face.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15–3
Accounting as the “Language of Business”
• Accounting
– Is the recording, summarizing, and reporting of the
economic activities and events of an organization
– Is used to make business decisions
– Is essential to managing and controlling operations
• Financial Statements:
–
–
–
–
Income statement
Balance sheet
Statement of retained earnings
Statement of cash flows
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15–4
Financial Statements
• Income Statement
– Summarizes the revenues earned and the expenses
incurred by a business over a period of time
• Balance Sheet
– Lists the balances of the asset, liability, and owners’
equity accounts of a business on a specific date
• Statement of Retained Earnings
– Shows beginning balance, additions and reductions,
and ending balance of retained earnings
• Statement of Cash Flows
– Indicates the firm’s inflows and outflows of cash
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15–5
Financial Statements
Income
Statement
Balance
Sheet
Statement of
Retained Earnings
Statement of
Cash Flows
Summarizes the
revenues earned
and the expenses
incurred by a
business over a
period of time
Lists the balances of
the asset, liability,
and owners’ equity
accounts of a
business on a
specific date
Shows beginning
balance, additions
and reductions, and
ending balance of
retained earnings
Indicates the firm’s
inflows and
outflows of cash
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15–6
EXHIBIT 15.1 FUNDAMENTAL FINANCIAL QUESTIONS AND ANSWERS
Financial Statement
Question
Answer
Income Statement
How much did the
firm earn or lose
from operations
during the period?
Revenues − Expenses
= Net income (or Net loss)
Statement of
Retained Earnings
In what way did the
firm’s retained
earnings change
during the period?
Beginning retained earnings + Net income
(or − net loss) − Dividends
= Ending retained earnings
Balance Sheet
What is the firm’s
financial position at
a designated point in
time?
Assets = Liabilities + Owners’ Equity
Statement of Cash
Flows
What amount of
cash was generated
and spent during the
period?
Operating cash flows ± Investing cash flows
± Financing cash flows
= Increase (or decrease) in cash during
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15–7
EXHIBIT 15.2 EXTERNAL USERS OF ACCOUNTING INFORMATION
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15–8
Generally Accepted Accounting
Principles (GAAP)
• Statements of Financial Accounting Standards
(SFAS)
– Part of the highest level of generally accepted
accounting principles (U.S. GAAP), issued by the
Financial Accounting Standards Board (FASB)
• Certified Public Accountants (CPAs).
– Are licensed by state examinations and experience
– Provide auditing, tax, and consulting services
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15–9
EXHIBIT 15.3 AUTHORITATIVE ACCOUNTING LITERATURE
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15–10
International GAAP
• International Financial Reporting Standards
(IFRS or International GAAP)
– State how transactions and other events should be
reported in financial statements developed by the
International Accounting Standards Board
– IFRS are regarded as being more principles-based and
U.S. GAAP as being more rules-based
– Different GAAPs in other countries make it difficult for
investors and financial statement users to compare
financial reports of firms from different countries
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15–11
Differences Between U.S.
and International GAAP
• Factors influencing the development of
accounting and financial reporting standards:
Political and legal systems
Sources of capital
Business complexity
Inflation
Taxation
Culture
Accidents of history
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15–12
International Financial Reporting Standards
• International Accounting Standards Board (IASB)
– An independent, privately funded accounting
standard-setter based in London, U.K., that issues
International Financial Reporting Standards
• Objectives of the IASB
– Increasing harmonization of accounting standards and
disclosures to meet the needs of the global market
– Providing an accounting basis for underdeveloped or
newly industrialized countries to follow
– Increasing compatibility of domestic and international
accounting requirements for audited financial
statements
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15–13
The Role of Auditing
• Auditing
– Is charged with the responsibility of ensuring that the
internal control structure is operating effectively
– Works to assure that financial statements do not
contain material misstatements, either intentional or
unintentional
– Provided by an independent external auditor serves to
indicate whether those statements are presented
according to generally accepted accounting principles
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15–14
Steps in the Auditing Process
Plan the
audit
Obtain and
evaluate
evidence
Arrive at an
audit opinion
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Communicate
the audit
results
15–15
Financial Statement Audit Objectives
• Confirming the existence of assets and liabilities and
occurrence of income and expenses
• Assessing the completeness of the financial statements
(all assets, liabilities, income, and expenses are
accounted for)
• Proper valuation of assets, liabilities, income, and
expenses
• Showing that the auditee owns the assets and is
obligated to the extent of liabilities shown
• Assuring that financial statement items are properly
presented and disclosure regulations have been followed
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15–16
The Sarbanes-Oxley (SOX) Act of 2002
• Effects of SOX:
– Increased prison sentences for financial statement
fraud
– Established the Public Company Accounting Oversight
Board (PCAOB) to set auditing, attestation, quality
control, and ethical standards for auditors formerly
self-regulated under the American Institute of
Certified Public Accountants’ peer review system
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15–17
Financial Statement Analysis
• Financial Statement Analysis
– Is an evaluation of financial statements to identify
significant trends or relationships among the items
• Financial Ratios
– Use the relationship of a number on the financial
statement to another number to assess the firm’s
financial condition:
Debt Ratio =
Total Liabilities
Total Assets
Current Ratio =
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Current Assets
Current Liabilities
15–18
Global Tax Matters
Income
tax
Corporate
income
tax
Sales tax
Types
of
Taxes
Valueadded tax
(VAT)
Goods
and
services
tax (GST)
Property
tax
Payroll
tax
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15–19
EXHIBIT 15.4 CORPORATE INCOME TAX RATES IN OECD COUNTRIES
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15–20
Transfer Pricing
• Transfer Pricing
– Is the pricing of goods and services transferred
(bought and sold) internally between units of an
international firm involving:
• Raw materials and semi-finished and finished goods
• Allocation of fixed costs
• Loans, fees and royalties for use of trademarks and copyrights
– Can affect local taxes owed and the firm’s profits
– May be subject to the laws and regulations of the
countries in which the firm conducts business
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15–21
EXHIBIT 15.5 TRANSFER PRICING SCENARIOS
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15–22
KEY TERMS
accounting
income statement
balance sheet
statement of retained
earnings
statement of cash flows
accounting information
system (AIS)
management accounting
financial accounting
generally accepted
accounting principles (GAAP)
Statements of Financial
Accounting Standards
(SFAS)
International Accounting
Standards Board (IASB)
International Financial
Reporting Standards (IFRS)
financial statement analysis
financial ratio
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15–23