Communicating and Interpreting
Accounting Information
Chapter 5
McGraw-Hill/Irwin
© 2009 The McGraw-Hill Companies, Inc.
Understanding the business
Corporate Governance:
Procedures to ensure that
the company is managed in
the interest of the
shareholders
Sarbanes-Oxley Act:
A law which strengthens
financial reporting and
corporate governance for
public companies.
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Slide 2
Players in the Accounting
Communication Process
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Slide 3
Regulators
Securities and Exchange Commission
Protects investors and maintain the integrity of the
securities market.
Financial Accounting
Standards Board
Sets Generally Accepted
Accounting Standards
(GAAP).
McGraw-Hill/Irwin
Public Company
Accounting Oversight
Board
Sets auditing standards for
independent auditors (CPAs)
of public companies.
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Slide 4
Managers
Managers are responsible for the information in
the financial statements and disclosures.
Chief Executive Officer (CEO): highest officer of the
company
Chief Financial Officer (CFO): highest officer
associated with the financial and accounting side of the
business
Accounting staff prepare the details of the reports
and also bear professional responsibility for the
accuracy of the information.
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Slide 5
Auditors
Independent Auditors
Follow established auditing standards to assess the fairness
of the financial statements and related presentations
An unqualified, or clean,
opinion states that the
financial statements are fair
presentations in all material
respects in conformity with
GAAP.
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Unqualified
Opinion
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Slide 6
Board of Directors (Audit Committee)
Board of Directors
The board of directors is elected by the
stockholders to represent their interests.
Board of Directors (Audit Committee)
The audit committee of the board of directors is
responsible for maintaining the integrity of the
company’s financial reports.
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Slide 7
Annual Reports
For privately held companies, annual reports are
simple documents that include:
1. Four basic financial statements.
2. Related notes (footnotes).
3. Report of independent accountants (auditor’s
opinion) if the statements are audited.
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Annual Reports
For public companies, annual reports are elaborate due to
SEC reporting requirements:
1. Nonfinancial Section

Includes a letter to the stockholders, a description of management’s
philosophy, products, successes, etc.
Financial Section
2.

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SEC sets minimum disclosure standards for the financial section for
public companies.
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Annual Reports to Shareholders
1. Summarized financial data
for 5- or 10-years.
2. Management Discussion and
Analysis (MD&A).
3. The four basic financial
statements.
4. Notes (footnotes).
5. Independent Accountant’s
Report and the
Management Certification.
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6. Recent stock price
information.
7. Summaries of the unaudited
quarterly financial data.
8. Lists of directors and
officers of the company and
relevant addresses.
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Quarterly Reports to Shareholders
Usually begin with short letter to stockholders
Condensed unaudited income statement and balance sheet
for the quarter.
Often, cash flow statement and statement of stockholders’
equity are omitted. Some notes to the financial statements
also may be omitted.
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SEC Reports – 10-K, 10-Q, 8-K
Form 10-K Annual Report
•Due within 90 days of the fiscal year-end.
•Contains audited financial statements.
Form 10-Q Quarterly Report
•Due within 45 days of the end of the quarter.
•Financial statements can be unaudited.
Form 8-K Current Report
•Due within 4 days of the major event date.
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Statement of Comprehensive income
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Gross Profit Percentage
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Slide 14
Return on Assets (ROA) Analysis
Return
=
on
Assets
Net Income*
Average Total Assets1
ROA measures how much the firm earned for
each dollar of investment.
*(In
complex calculations, interest expense (net of tax) and minority interest
are added back to net income.
1(beginning
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total assets + ending total assets) ÷ 2
Slide 15
ROA Profit Driver Analysis
Net Income
Average
Total Assets
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=
Net Profit
Margin
=
Net Income
Net Sales
×
Asset
Turnover
×
ROA
Net Sales
Average
Total Assets
Slide 16
Differences in Accounting Methods
acceptable under
ifrs and u.s. gaap
Many countries have adopted international financial reporting standards
(IFRS) issued by the International Accounting Standards Board (IASB).
IFRS are similar to U.S. GAAP, but there are several important
differences. The FASB and IASB are working together to eliminate these
and other differences.
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End of Chapter 5
© 2008 The McGraw-Hill Companies, Inc.