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| Corporate Governance | The procedures designed to ensure that the company is managed in the interests of the shareholders |
| Corporate Governance: Aim? Why? | Much of it is aimed at ensuring integrity in the financial reporting process= Good corporate governance eases the company's access to capital, lowering both the costs of borrowing (interest rates) and the perceived riskiness of stock |
| Result of bad/untruthful accounting numbers | When investors lose faith in the truthfulness of a firm's accounting numbers, they also normally punish the company's stock |
| Disclosure of an accounting fraud | Causes (on average) a 20% drop in the price of a company's stock |
| Public Accounting Reform and Investor Protection Act | (The Sarbanes-Oxley Act) Strengthens financial reporting and corporate governance for public companies (was passed by Congress in an attempt to restore investor confidence) |
| US Securities and Exchange Commission | (SEC) Mission is to protect investors and maintain the integrity of the securities markets= Oversees the work of the Financial Accounting Standards Board (FASB) that sets generally accepted accounting principles (GAAP), the Public Company Accounting Oversight Board (PCAOB) that sets auditing standards for independent auditors (CPAs) of public companies, and the Stock Exchanges (e.g. New York Stock Exchange) that, along with state governments, set overall corporate governance standards= SEC staff also reviews the reports filed with it for compliance with its standards, investigates irregularities, and punishes violators |
| Who has the primary responsibility for the information in a business's financial statements and related disclosures? | Lies with management, specifically the highest officer in the company, called the "Chairman and Chief Executive Officer" (CEO), and the highest officer associated with the financial and accounting side of the business, often called the "Chief Financial Officer" (CFO) |
| CEO and CFO | Must personally certify that each financial report filed with the SEC does not contain any untrue material statement or omit a material fact and fairly presents in all material respects the financial condition, results of operations, and cash flows of the company= Must also make sure that there are no significant deficiencies and material weaknesses in the internal controls over financial reporting= They also must ensure that they have disclosed to the auditors and audit committee of the board any weaknesses in internal controls or any fraud involving management or other employees who have a significant role in financial reporting |
| What happens when executives knowingly certify false financial reports? | Are subject to a fine of $5 million and a 20-year prison term= Members of the ACCOUNTING STAFF (who actually prepare the details of the reports) also bear professional responsibility for the accuracy of this information, although their legal responsibility is smaller |
| Board of Directors | Is elected by the stockholders= Is responsible for ensuring that processes are in place for maintaining the integrity of the company's accounting, financial statement preparation, and financial reporting |
| Audit Committee of the Board of Directors | Must be composed of non-management (independent) directors with financial knowledge= Is responsible for hiring the company's independent auditors= They also meet separately with the auditors to discuss management's compliance with their financial reporting responsibilities |
| What does the SEC require publicly traded companies to do? | To have their statements and their control systems over the financial reporting process audited by an independent registered public accounting firm (independent auditor) following auditing standards established by the PCAOB (many privately owned companies also have their statements audited) |
| Unqualified (clean) Audit Opinion | Upon signing this, a CPA firm assumes part of the financial responsibility for the fairness of the financial statements and related presentations= This opinion, which adds credibility to the statements, is also often required by agreements with lenders and private investors= Subjecting the company's statements to independent verification reduces the risk that the company's financial condition is misrepresented in the statements= As a result, rational investors and lenders should lower the rate of return (interest) they charge for providing capital |
| Financial Analysts | Receive accounting reports and other information about the company from electronic information services= They also gather information through conversations with company executives and visits to company facilities and competitors= The results of their analyses are combined into analysts' reports= Often work in the research departments of brokerage and investment banking houses, mutual fund companies, and investment advisory services (that sell their advice to others) |
| Analysts' Reports | Normally include forecasts of future quarterly and annual earnings per share and share price; a buy, hold, or sell recommendation for the company's shares; and explanations for their judgments |
| Earnings Forecasts | (Are made by financial analysts) Are the predictions of earnings for future accounting periods= When making these forecasts, the analysts rely heavily on their knowledge of the way the accounting system translates business events into the numbers on a company's financial statements |
| Market Efficiency | Refers to a quick, unbiased reaction to information (supplied by financial analysts [this information often effects the stock market]) |
| EDGAR Service | (Electronic Data Gathering and Retrieval Service) Is where/how companies actually file their SEC forms electronically= Is sponsored by the SEC= Users can retrieve information from EDGAR within 24 hours of its submission, long before it is available through the mail= EDGAR is a free service |
| pg. 237 | pg. 237= List of information intermediaries |
| Institutional Investors | Are managers of pension, mutual, endowment, and other funds that invest on the behalf of others= Include PENSION FUNDS (associated with nions and employees of specific companies or government agencies), mutual funds, and endowment, charitable foundation, and trust funds (such as the endowment of you college or university)= These institutional stockholders usually employ their own analysts who also rely on the information intermediaries |
| Institutional Shareholders | Control the majority of publicly traded shares of US companies |
| Who do most small investors own stock in big companies? | Indirectly through mutual and pension funds |
| Private Investors | (Include individuals who purchase shares in companies) Include large individual investors as well as small retail investors who buy shares of publicly traded companies through brokers= |
| Retail Investors | Normally lack the expertise to understand financial statements and the resources to gather data efficiently= They often rely on the advice of information intermediaries or turn their money over to the management of mutual and pension funds (INSTITUTIONAL INVESTORS) |
| Lenders (aka Creditors) | Include suppliers, banks, commercial credit companies, and other financial institutions that lend money to companies= Lending officers and financial analysts in these organizations use public sources of information= They also use additional financial information (e.g. monthly statements) that companies often agree to provide as part of the lending contract |
| Lenders: Private Companies | Lenders are the primary external user group for financial statements of private companies |
| When do Institutional and Private Investors become Creditors? | When they buy a company's publicly traded bonds |
| Financial Statements: Suppliers and Customers | Customers evaluate the product based off of the the financial statement (i.e. is the product good, etc.)= Suppliers evaluate their customers to estimate their future needs and ability to pay debts |
| Financial Statements: Competitors | Competitors try to learn useful info about a company from its statements |
| What is one of the costs of Public Financial Disclosures? | The potential loss of competitive advantage |
| Cost-Benefit Constraint | Suggest that the benefits of accounting for and reporting information should outweigh the costs (this is the way of trying to help companies keep some of the competitive advantage when they produce public financial disclosures) |
| Relevant Information | Relevant accounting information is capable of influencing decisions by allowing users to asses past activities and/or predict future activities |
| Reliable Information | Is accurate, unbiased, and verifiable (independent parties can agree on the nature of the transaction and amount) accounting info |
| Consistent Information | Means that within a company, similar accounting methods have been applied over time |
| Comparable Information | Means that similar accounting methods have been applied across companies |
| Immaterial Amounts | Are small amounts that do not have to be reported separately or accounted for precisely according to GAAP if they would not influence users' decisions |
| Material Amounts | Are amounts that are large enough to influence a user's decision |
| Conservatism | Suggests that care should be taken not to overstate assets and revenues or understate liabilities and expenses= Requires that special care be taken to avoid (1) overstating assets and revenues and (2) understanding liabilities and expenses |
| Conservatism: What does it attempt to do? | Attempts to offset managers' natural optimism about their operations, which sometimes creeps into the financial reports they prepare= This constraint produces more conservative income statement and balance sheet amounts |
| Fair Disclosure | (FD) SEC regulation FD, for "Fair Disclosure" requires that companies provide all investors equal access to all important company news= Managers and other insiders are also prohibited from trading their company's shares based on nonpublic (insider) information so that no party benefits from early access |
| Press Release | Is a written public news announcement normally distributed to major news services= To provide timely info to external users and to limit the possibility of selective leakage of info, public companies announce quarterly and annual earnings through a PRESS RELEASE as soon as the verified figures (audited for annual and reviewed for quarterly earnings) are available= The announcements are sent electronically to the major print and electronic news services |
| What typically follows Press Releases | A conference call, during which senior managers answer questions about the quarterly results from analysts= These calls are open to the investing public |
| Press Release: Other functions | Companies also issue press releases concerning other important events including new product announcements and new endorsement contracts, etc. |
| Annual Reports for privately held companies | Are relatively simple documents= Normally include 4 basic financial statements (income statement, balance sheet, stockholders' equity or retained earnings statement, & cash flow statement); related notes; REPORT OF INDEPENDENT ACCOUNTANTS (Auditor's Opinion) if the statements are audited |
| Annual Reports of public companies | Are normally split into 2 sections: (1) "NONFINANCIAL" Section usually includes a letter to stockholders from the Chairman and CEO; descriptions of the comapny's management philosophy, products, successes (and occasionally failures); and exciting prospects and challenges for the future= beautiful photographs of products, facilities, etc. are often included= (2) "FINANCIAL" Section includes the core of the report |
| Quarterly Reports | Normally begin with a short letter to shareholders= This is followed by a condensed income statement for the quarter (often shows less detail that the annual income statement) and a condensed balance sheet dated at the end of the quarter= These condensed financial statements are not audited and so are marked UNAUDITED |
| Periodic Reports | Public companies must file periodic reports with the SEC= They include the annual report on FORM 10-K, quarterly reports on From 10-Q, and current event reports on Form 8-K |
| Form 10-K | Is the annual report that publicly traded companies must file with the SEC |
| Form 10-Q | Is the quarterly report that publicly traded companies must file with the SEC |
| Form 8-K | Is used by publicly traded companiesto disclose any material event not previously reported that is important to investors (e.g. auditor changes, mergers, etc.) |
| 10-K and 10-Q | Often present all info in the annual and quarterly reports, respectively, along with additional management discussiona nd several required schedules |
| 10-K: What info does in contain | Provides a more detailed description of the business including its products, product development, sales and marketing, manufacturing, and competitors= It also lists properties owned/leased, any legal proceeding it is involved in, and significant contracts it has signed= Also provides more detailed schedules concerning various figures on the income statement and balance sheet including bad debts, warranties, etc. |
| Consolidate Balance Sheets | Contains INTANGIBLE ASSETS on top of everything else that the normal balance sheet has |
| Intangible Assets | Have no physical existence and a long life (EX: patents, trademarks, goodwill from purchasing other companies, etc.)= Most intangibles except goodwill, trademarks, and other intangibles with indefinite lives are AMORTIZED as they are used, in a manner similar to the depreciation of tangible assets= They are reported net of accumulated amortization on the balance sheet |
| Contributed Capital | Financing by investors= However, in practice, this account often is shown as 2 accounts: COMMON STOCK and ADDITIONAL PAID-IN CAPITAL= Each of the common stock usually has a nominal (low) PAR VALUE printed on the face of teh certificate |
| Par Value | Is a legal amount per share established by the board of directors= It establishes the minimum amount a stockholder must contribute and has no relationship to the market price of the stock |
| When a corporation issues capital stock, how is it recorded? | The amount received is recorded in part as COMMON STOCK (= Number of Shares X Per Value per Share) and the excess above par as ADDITIONAL PAID-IN CAPITAL (aka Paid-In Capital or Contributed Capital in Excess of Par) |
| Additional Paid-In Capital | (aka Paid-In Capital or Contributed Capital in Excess of Par)= Is the amount of contributed capital less the par value of the stock |
| Classified Income Statement | Income statements have 2 major section: the first presents the income statement; the second presents net income on a per share basis or earnings per share |
| Gross Profit | (aka Gross Margin) Is net sales less cost of goods sold |
| Income from Operations | (aka Operating Income) Equals net sales less cost of goods sold and other operating expenses |
| Nonoperating (other) Items | Are income, expenses, gains, and losses that do not relate to the company's primary operations (EX: interest income, interest expense, and gains/losses on the sale of fixed assets and investments)= These items are added to/subtracted from income from operations to obtain INCOME BEFORE INCOME TAXES |
| Income Before Income Taxes | Is revenues minus all expenses except income tax expense |
| Nonrecurring Items: What items might companies report/not report on their income statements? | Discontinued Operations and/or Extraordinary Items= If any one of these items exists, an additional subtotal is presented for INCOME FROM CONTINUING OPERATIONS (or Income before Nonrecurring Items), after which the nonrecurring items are presented= These 2 items are presented separately because they are not useful in predicting the future income of the company given their nonrecurring nature |
| What happens when a major component of a business is sold or abandoned? | Income or loss from that component (as well as any gain or loss on disposal) are included as discontinued operations |
| Extraordinary Items | Are gains or losses incurred that are both unusual and infrequent in occurrence |
| Earnings Per Share= ? | Earnings Per Share= [Net income*] / [Average Number of shares of common stock Outstanding during the period]= (*= if there are preferred dividends, the amount is subtracted from Net Income in the numerator) |
| Common-Size Income Statements | Are income statement line items that are reported as a % of net sales |
| The Statement of Stockholders' (Shareholders') Equity | Reports the changes in each of the company's stockholders' equity accounts during the accounting period |
| Cash Flows from Operating Activities | Section that reports cash flows associated with earning income |
| Cash Flows from Investing Activities | Cash flows in this section are associated with purchase and sale of (1) productive assets (other than inventory) and (2) investments in other companies |
| Cash Flows from Financing Activities | These cash flows are related to financing the business through debt issuances and repayments, stock (equity) issuances and repurchases, and dividend payments |
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