1
ACCT 6500
Corporate Financial Reporting (Professor Koester)
MBA Program (FT): Mon October 23 & Wed Oct 25, 2023
Sessions 1 & 2:
Financial Reporting
& Disclosure Environment
Student Version
2
Agenda
1. Course logistics
2. Course framework
3. What is corporate financial reporting?
4. U.S. publicly traded firms’ financial reporting
& disclosure environment
3
Course
Logistics
4
Course Logistics
•
Our course’s Canvas homepage is your one-stop
shop for everything you need:
https://georgetown.instructure.com/courses/171979
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Session 1
Prep Check #1
Session 2
11:59pm
Quiz #1 6pm
Session 3
Session 4
11:59pm
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Session 3
Session 4
Prep Check #2
11:59pm
Quiz #2 6pm
Session 5
Session 6
11:59pm
Prep Check #3
11:59pm
Quiz #3 6pm
Session 7
Session 8
11:59pm
Prep Check #4
11:59pm
Quiz #4 6pm
Session 9
11:59pm
Thanksgiving Break
Prep Check #5
11:59pm
Session 10
Session 11
Quiz #5 6pm
11:59pm
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Prep Check #6
11:59pm
11:59pm
Quiz #5 6pm
Session 12
Final Exam
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Course
Framework
9
How This Fall Might Feel…
10
What I Hope You Remember in 5 Years
Corporate Operating
& Strategic Decisions
Financial
Information
• Develop a framework for understanding how corporate
decisions generate financial information
• Understand what the financial metrics do (and do not) tell
• Use financial data for informed decision-making at work
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What I Hope You Remember in 5 Years (cont.)
• How and why corporate economic events affect a
firm’s Income Statement and Balance Sheet
• Understand both the forest and the trees
•
Trees: we need to understand financial accounting
•
•
•
•
Why revenues are often ≠ Cash Inflows
Why expenses are often ≠ Cash Outflows
Why financial statements are filled with estimates which
often need to be corrected and updated when new
information becomes available in future periods
Forest: Scrutinize public firms’ financial statements
to see that these are just a bunch of trees standing
together trying to tell a firm’s economic story
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How Most Sessions are Structured
#3: Illustrate these concepts
using public firms’
financial disclosures
#2: Apply the framework
at “Firm A”
#1: Establish the conceptual
framework for corporate
events and transactions
13
What is Corporate
Financial Reporting?
14
What is Corporate Financial Reporting?
•
Measurement and communication of corporate economic
activity by providing structured information about firms’
financial performance and financial condition
• Structured: All U.S. firms follow the same playbook, so
information is reasonably comparable across firms and time
• Financial Performance:
• What happened during a period of time?
• Income Statement and Statement of Cash Flows
• Financial Condition:
• What does a firm look like at a point in time?
• Balance Sheet
15
Income Statement (“simple”)
“Common Size”
Revenues
- Expenses
Profit
$1,000
$ (850)
$ 150
100%
(85%)
15%
16
Firm A
Income Statement
Jan 1 - Dec 31, 2022
“Common Size”
(in millions)
Revenues
-Cost of Revenues
$ 1,000
-600
100%
-60%
Gross Profit
-Selling, General, & Administrative Expenses
400
-292
40%
-29%
Operating Income
-Interest Expense
Other Income (Expenses)
108
-19
11
11%
-2%
1%
Earnings before Taxes
-Tax Expense
100
-21
10%
-2%
79
8%
Net Income
$
Not e: account amount s ar e net of associ at ed cont r a-account s
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Income Statement (“multi-step”)
18
Income Statement (“multi-step”)
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Income Statement (“multi-step” & “common size”)
100%
25%
75%
18%
39%
13%
69%
6%
-1%
1%
6%
3%
2%
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Cash Basis vs. Accrual Basis Accounting
• Cash Basis:
•
Financial performance measured by cash inflows and outflows
•
Cash In – Cash Out = Cash Remaining
• Accrual Basis:
•
Financial performance measured by when revenue is
earned and expenses are incurred
•
Revenues can be recognized before or after cash is received
•
Expenses can be recognized before or after cash is paid
•
Cash flows do not necessarily tell us about profitability
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Revenue Recognition Framework
Guiding principle:
• Revenue is recognized as performance obligations
within a contract are satisfied, for an amount that
reflects the consideration expected to be received
in exchange for satisfying those obligations [ASC 606]
Punchline:
• As performance obligations are met
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Revenue Recognition at
What does this firm do to generate revenue?
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Revenue Recognition at
What does this firm do to generate revenue?
https://zoom.us/pricing
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Revenue Recognition at
Assume that on December 31, 2022 Firm Z signs a
one-year contract with Zoom for the “Business Plus” plan
($250/year/user). Firm Z’s 24 employees will have a full
year of access to this plan beginning January 1, 2023.
1. How much total revenue will Zoom recognize?
2. When is revenue recognized if Firm Z pays Zoom:
(a) The same amount each month at the end of each month?
(b) The full amount when the contract is signed (Dec. 31, 2022)?
(c) The full amount on the last day of the contract (Dec. 31, 2023)?
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Revenue Recognition at
• In the firm’s own words:
…
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Revenue Recognition at
• In the firm’s own words:
…
…
…
…
…
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Expense Recognition Framework
Guiding principle:
• Lots of different standards here because there are
so many types of expenses (too detailed for today)
Punchline:
• As something is used up
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Expense Recognition at
What do this firm’s largest expenses generally relate to?
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Expense Recognition at
Assume that in December 2022, Zoom hires Anjali to
work in product development. Anjali will start work on
January 1, 2023 and earn a monthly salary of $10,000.
1. How much expense is recognized in December 2022?
2. When is expense recognized if Zoom pays Anjali in:
(a) January for the work she performed in January?
(b) January for work she will perform in February?
(c) February for work that she performed in January?
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Expense Recognition at
• In the firm’s own words:
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Statement of Cash Flows
Firm A
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Statement of Cash Flows
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Statement of Cash Flows
Year Ended Jan 31,
2023
(in tho usands)
Cash, beginning of year
$
1,073,353
Three
ThreeTypes
TypesofofCash
CashFlows:
Flows:
Operating
OperatingActivities
Activities
InvestingActivities
Activities
Investing
FinancingActivities
Activities
Financing
1,290,262
(318,322)
(936,942)
Changesininforeign
foreignexchange
exchangerates
rates
Changes
(8,108)
26,890
Cash, end of year
$
1,100,243
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Investing Cash Flows
• What economic activity does each line item describe?
Year Ended Jan 31,
2023
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Financing Cash Flows
• What economic activity does each line item describe?
Year Ended Jan 31,
2023
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Financing Cash Flows
• What economic activity does each line item describe?
Year Ended Jan 31,
2023
2022
2021
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Stock Performance
Zoom
Nasdaq Computer Index
Russell 2000 Index
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Using Cash Flows to Infer a Firm’s Life Cycle
• Which life cycle best describes Zoom?
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What is Corporate Financial Reporting?
•
Measurement and communication of corporate economic
activity by providing structured information about firms’
financial performance and financial condition
• Structured: All U.S. firms follow the same playbook, so
information is (reasonably) comparable across firms and time
• Financial Performance:
• What happened during a period of time?
• Income Statement and Statement of Cash Flows
• Financial Condition:
• What does a firm look like at a point in time?
• Balance Sheet
40
Balance Sheet
Assets
=
Liabilities + Owners’ Equity
Assets – Liabilities = Owners’ Equity
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Balance Sheet
• Assets
• Things that provide economic benefit
• Liabilities
• Things that require economic sacrifice
• Owners’ Equity
• Benefits that remain after the sacrifices are made
• Two primary components:
• Contributed Capital: What shareholders paid for their ownership interest
• Earned Capital: Accumulated profits not yet distributed to shareholders
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Balance Sheet
as of Dec 31, 2022
Firm A
“Common Size”
(in millions)
Assets
Cash
Marketable Securities
Accounts Receivable
Inventory
Other
Current Assets
$
Plant, Property, & Equipment
Intangibles
Goodwill
Other
Long-term Assets
Total Assets
78
105
127
154
46
510
645
168
277
125
1,215
$
5%
6%
7%
9%
3%
30%
37%
10%
16%
7%
70%
1,725 100%
Liabilities
Accounts Payable
Other
Current Liabilities
$
87
118
205
5%
7%
12%
Deferred Revenue
Leases
Deferred Tax Liabilities
Long-term Debt
Other
Long-term Liabilities
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152
70
504
80
844
4%
29%
Owners' Equity
Common Stock
Additional Paid in Capital
Treasury Stock
Retained Earnings
Total Equity
12
491
(64)
237
676
1%
28%
-4%
14%
39%
Total Liabilities & Equity
$ 1,725 100%
Note: account amounts are net of associated contra-accounts
2%
9%
5%
49%
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Balance Sheet
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Balance Sheet Excerpts
Current Ratio = Current Assets ÷ Current Liabilities = ____
• What economic activity does this line item describe?
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Deferred Contract Acquisition Costs
…
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Balance Sheet Excerpts
Current Ratio = Current Assets ÷ Current Liabilities = ____
Quick Ratio = (Cash + Securities + A/R) ÷ Current Liabilities = ____
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How the Three Financial Statements Relate
Relation Among the Balance Sheet, Income Statement, and Statement of Cash
Flow
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U.S. Publicly Traded Firms’
Financial Reporting &
Disclosure Environment
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Who Writes the Reporting Playbook?
• FASB decides how firms publicly traded on a U.S.
stock exchange account for things
• FASB = Financial Accounting Standards Board
• “Account for things” = US Generally Accepted Accounting
Principles (US GAAP)
• Who put the FASB in charge of this?
• Thank the U.S. Congress
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1934
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Who Writes the Reporting Playbook? (cont.)
• Stock market crash in 1929 crushed public
confidence in financial markets
• Congress acts to provide potential solutions so
this doesn’t happen again
• Legislation most relevant to this course:
• Securities Act of 1933
• Securities Exchange Act of 1934
• Created the Securities and Exchange Commission (SEC)
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What the SEC Does
• Three-part mission:
1. Protect investors
2. Maintain fair, orderly, and efficient markets
3. Facilitate capital formation
• Congress grants the SEC the authority to both set
and enforce accounting standards
• SEC permits FASB to set U.S. GAAP
• SEC enforces corporate compliance with U.S. GAAP and
mandates most corporate disclosures (both what and when)
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SEC Disclosures Most Relevant to
Corporate Financial Reporting
• Form S-1
• Form 10-K & Form 10-Q
• Form DEF 14A
• Form 8-K
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Form S-1: Registration Statement
• Filed with the SEC prior to a firm issuing publicly
traded securities
• Part I: Prospectus
• Part II: Other things (employment agreements, bylaws, etc.)
• Our first glimpse into a private firm’s operations
• Financial statements
• Qualitative information (past, current, and future)
• Intended use of offering proceeds
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Securities Registration Process
• Firm confidentially files Form S-1 with the SEC
• SEC and the firm confidentially go back and forth
on the S-1 contents (with the firm revising the
contents until the SEC is satisfied)
• Firm files a final Form S-1 with the SEC at least 15
days prior to its anticipated public offering date
• At this point the final Form S-1 and all previously
confidential filings become public
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Benefits of Temporary Confidentiality
• Keeps a firm’s proprietary financial information
private for a bit longer (a few months)
• Financial information remains private if a firm
changes its mind and decides to not issue shares
• More flexibility in setting public offering date and
number of shares to be sold
57
Ways a Firm can Become Publicly Traded
on a U.S. Stock Exchange
1. Initial Public Offering (IPO) most common
2. Direct Listing
3. Be acquired by a firm that is publicly traded
• This includes being acquired by a Special Purpose
Acquisition Company (SPAC)
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U.S. IPO Activity
https://insight.factset.com/u.s.-ipo-activity-drops-dramatically-in-the-first-half-of-2022
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High-Profile IPOs
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Direct Listing
• Firm becomes publicly traded through existing
investors selling their shares on an exchange
• No cash flows into the firm because no new shares are issued
• Benefits (firm perspective):
61
High-Profile Direct Listings
[Acquired by
in 2021]
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Be Acquired by a SPAC
• Shell firm becomes publicly traded with sole intent of
raising funds to acquire a privately-held operating
firm within a two-year time frame
• Benefits (firm perspective):
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High-Profile Firms Acquired by SPACs
Virgin Galactic
Draft Kings
WeWork
Nikola Motor Co.
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Zoom’s IPO Process
• Dec 21, 2018: Zoom confidentially submits a draft
registration statement on Form S-1 to the SEC
• Feb 7, 2019: SEC confidentially sends Zoom a “comment
letter” with things that need to be cleaned up in its draft S-1
• Feb 15: Zoom confidentially submits a revised draft S-1
• …SEC comments, Zoom fixes, SEC comments, Zoom
fixes…
• Mar 22: Zoom publicly files Form S-1
• April 18: Zoom becomes a publicly traded firm
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Zoom’s IPO (April 18, 2019)
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Zoom’s IPO Process
• How do we know about all of this activity if everything is
confidential prior to March 22, 2019?
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Zoom’s Form S-1
• Financial data from when the firm was privately held
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Form 10-K: Annual Report
…
• Covers one year of financial operations
• Financial statements, footnotes, MD&A, etc.
• Filed within 60 days of a firm’s year-end
• Audited by independent auditors
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Zoom’s Form 10-K [Jan 31 2023 FYE]
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Zoom’s Form 10-K [Jan 31 2023 FYE]
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Form 10-Q: Quarterly Report
• Covers one quarter of financial operations
• Financial statements, footnotes, MD&A, etc.
• But less detailed than Form 10-K
• Filed within 45 days of a firm’s quarter-end
• Reviewed by independent auditors
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Zoom’s Form 10-Q [July 31 2023 FQE]
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Second Quarter Information
Year-to-Date Information
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Form DEF 14A: Proxy Statement
• Also referred to as “Schedule 14A”
• Required for things that shareholders vote on
at the annual shareholders’ meeting
• Includes executive and board of director
information (including compensation) and
shareholder proposals
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…
80
Zoom’s Form DEF 14-A [2023]
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Zoom’s Form DEF 14-A [2023]
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Form 8-K: Current Report
…
• Announce major events of interest to shareholders
• Must be filed within 2 to 4 days of an event (based on event type)
• Examples:
• When financial information is publicly released
• Executive and director appointments/departures
• When financial statements should no longer be relied upon
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Zoom’s Form 10-K [Jan 31 2022 FYE]
…
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Where to Find Firms’ Financial Information
1. SEC EDGAR (Electronic Data Gathering, Analysis, and Retrieval)
• https://www.sec.gov/edgar/searchedgar/companysearch.html
2. A firm’s Investor Relations (IR) website
• https://investors.zoom.us/
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Why Corporate Financial Reporting Matters
• Reliable and relevant financial information is
necessary for decision-making
• External users:
• Investors deciding to purchase/sell stock and bonds
• Banks deciding to extend credit and establish credit terms
• Job seekers evaluating a potential employer’s financial prospects
• Firms evaluating credit-worthiness of customers and suppliers
• Internal users:
• Evaluating managerial & department performance
• Forecasting demand for products/services
•
Impacts decisions about product development and production, personnel hiring
and deployment, and geographic expansion
88
Why Corporate Financial Reporting Matters
• Nearly every career involves meeting financial
performance metrics
• People who are promoted understand:
• Which metrics matter the most
• Inputs that drive the metrics
•
“Hard” information (units sold) vs. “soft” estimates (expected returns)
•
Which inputs you (or someone else) can influence
• How to qualitatively articulate what the metrics reveal
• Which aspects of performance the metrics omit
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Agenda
1. Course logistics
2. Course framework
3. What is corporate financial reporting?
4. U.S. publicly traded firms’ financial reporting
& disclosure environment
90
Looking Ahead
• Sessions 1 & 2 topics:
• Quiz #1:
• Opens Thursday 6pm & closes Sunday 11:59pm
• 2 hour time clock begins once you access the link
• Sessions 3 & 4 (Revenues & Receivables) topics:
• All materials are on Canvas
• Prep Check #1
• Open now & closes Sunday 11:59pm
• Not timed
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End of
Sessions 1 & 2