IBC

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IBC Friends Presentation

• Financial Statements and Related Stuff

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FASBs Conceptual Framework

• SFAC No. 1 Objectives of Financial Reporting by
  Business Enterprises
• SFAC No. 2 Qualitative Characteristics of
  Accounting Information
• SFAC No. 3 Elements of Financial Statements of
  Business Enterprises
• SFAC No. 4 Objectives of Financial Reporting by
  Nonbusiness Organizations
• SFAC No. 5 Recognition and Measurement in
  Financial Statements of Business Enterprises
• SFAC No. 6 Elements of Financial Statements

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Objectives of Financial Reporting

• Provide information useful to economic decision
  makers
• Allow decision makers to predict businesses
  future cash flows (and cash flows they will
  receive from these businesses)
• Provide information concerning businesses assets
  and liabilities and related transactions and
  events

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Key Attributes of Accounting Information
Decision Usefulness
Understandability Relevance Reliability
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A Quick Trip through the Four Financial Statements

• Balance Sheet
• Income Statement
• Statement of Cash Flows
• Statement of Stockholders Equity /Statement of
  Retained Earnings

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The Balance Sheet

• A financial snapshot of a company at one point in
  time.

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The accounting or balance sheet equation
Assets Liabilities Owners Equity
Or
Assets - Liabilities Owners Equity
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Questions Answered by a Balance Sheet . . . Among
Others

• How much cash does a firm have on hand?
• Does a company have sufficient cash to pay off
  its debts that are coming due in the next few
  months?
• Does a firm have more long-term debt than its
  major competitor?

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Assets . . . defined

• Probable future economic benefits obtained or
  controlled by a particular entity as a result of
  past transactions or events.

Or
Things a company owns.
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Types of Assets

• Current Assets Cash, Short-Term Investments,
  Accounts Receivable, Inventory, and Prepaid
  Expenses
• Property, Plant Equipment
• Long-Term Investments
• Intangible Assets
• Other Assets

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Liabilities . . . defined

• Generally . . . amounts by businesses to third
  parties.

TYPES
Current Accounts Payable, Accrued Liabilities,
Notes Payable Long-Term Long-Term Notes
Payable, Mortgages Payable, Long-Term Accrued
Liabilities
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Stockholders Equity

• Common Stock
• Additional Paid-In Capital
• Retained Earnings

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BALANCE SHEET
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The Income Statement

• Basic Format
• Revenues - Expenses Net Income

Revenues Increases in assets and decreases in
liabilities resulting from an entitys
profit-oriented activities. Expenses Decreases
in assets and increases in liabilities resulting
from an entitys profit-oriented activities.
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Key Income Statement Items

• Gross Profit
• Operating Expenses
• Operating Income
• Earnings per Share

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Questions Answered by a Companys Income
Statement . . . Among Others

• Did the company earn a profit during its most
  recent fiscal year?
• What was the firms gross profit percentage?
• What is the firms principal source of revenue?

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INCOME STATEMENT
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Statement of Stockholders Equity. . . A Few Notes

• Essentially, this financial statement is a
  supporting schedule to the balance sheet.
• Reconciles the beginning-of-the-year and
  end-of-the-year dollar amounts of individual
  stockholders equity items.
• Question answered What events or transactions
  accounted for the changes in a companys
  stockholders equity over the previous year?
• Note Instead of an S.O.S. many companies
  prepare a Statement of Retained Earnings

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Statement of Retained Earnings

• The statement of retained earnings reports that
  portion of net income the company has retained,
  or kept for use in the business
• Net income increases retained earnings
• Dividends paid to stockholders decrease retained
  earnings

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STATEMENT OF RETAINED EARNINGS
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Statement of Cash Flows
Four Sections

• Reveals how a business generated and used cash
  during an accounting period.

• Cash flows from operating activities
• Cash flows from investing activities
• Cash flows from financing activities
• Reconciliation of a businesss cash balances at
  the beginning and end of a year

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STATEMENT OF CASH FLOWS

• Operating Activities
• Companies operate by buying goods and services,
  which are sold to customers
• Investing Activities
• Companies invest in long-term assets that are
  used to run the business
• Financing Activities
• Companies finance themselves by issuing stock and
  borrowing money

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Questions Answered by a Statement of Cash Flows .
. . Among Others

• How does a firms cash flows from its operating
  (profit-oriented) activities compare to its net
  income?
• What was the major source of the companys cash
  inflows during its most recent year?
• During the past year, what was the firms major
  cash outflow?

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Accounting Gimmicks

• Asset Issues
• Inflating inventory
• Understating allowance for bad debts
• Overstating useful lives of depreciable assets
• Misclassifying current assets liabilities
• Capitalizing expenses
• Pumping Up Revenues
• Channel stuffing
• Bill and hold sales
• Grossing up revenues
• Front loading

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Assorted Other Sordid Accounting Tricks

• Issuing pro forma earnings
• Bribes kickbacks
• Skimming cash receipts
• Lapping accounts receivable
• Lying to your auditors

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A Few Red Flags

• Revenues rising but operating cash flows stagnant
  or falling
• Receivables growing more rapidly than sales
• Inventory growing more rapidly than accounts
  payable
• Complex/convoluted transactions
• Related party transactions
• Lotsa management turnover

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Recent Accounting Disasters

• Enron SPEs SPVs
• WorldCom Capitalizing expenses
• Leslie Fay Inflating inventory
• Livent Overstating revenues (bogus ticket
  sales)
• Lincoln Savings Loan Swapping desert land to
  produce bogus profits