Accounting Chapter 5

Front 1

Corporate Governance

Back 1

a corporate governance system aimed at ensuring integrity in the financial reporting process

Front 2

SEC

Back 2

Protects investors and maintains integrity of securities markets; oversees FASB, GAAP, PCAOB, CPAs, and stock exchanges. Reviews reports for compliance

Front 3

Managers (CEO, CFO, and Accounting Staff)

Back 3

Responsible for information in financial statements and related siclosures. Certify that:
- No reports contain untrue statements
- Ensure no significant deficiences and material weaknesses in internal controls
- Must disclose to auditors an audit commitee of baord weaknesses or fraud in financial reporting

Front 4

Board of Directors (Audit Commitee)

Back 4

Elected by stockholders to represent their interests, is responsible for maintaining the integrity of the company's accounting, fin. statement prep, and financial reporting.

Front 5

Auditors

Back 5

independent registered public accounting firms that are required by SEC to audit financial reporting process to checkt that they meet auditing standards established by PCAOB

Front 6

Unqualified (Clean) Audit Opinion

Back 6

Auditor's statement that the financial statements are fair presentations in all material respects in conformity with GAAP

Front 7

Earnings Forecasts

Back 7

predictions of earnings for future earning periods

Front 8

Financial Analysts

Back 8

- receive accounting reports and other info about company from electronic info services
- gather info from comapny execs and visits to company facilities and competitors

Front 9

Institutional Investors

Back 9

managers of pension, mutual, endowment, and other funds that invest on the behalf of others

Front 10

Pension Funds

Back 10

Associated with unions, companies, or government agencies

Front 11

Trust Funds

Back 11

example: endowment of your college or university

Front 12

Private Investors

Back 12

Large individual investors who purchase shares in companies

Front 13

Lendors (Creditors)

Back 13

Suppliers and financial institutions that lend money to companies

Front 14

Cost-Benefit Constraint

Back 14

The benefits of accounting for reporting info should outweigh the costs

Front 15

Relevant Information

Back 15

Can influence a decision; it is timely and has predictive and/or feedback value

Front 16

Reliable Information

Back 16

Accurate, unbiased, and verifiable information (independent parties can agree on the nature of the trasnaction and amount)

Front 17

Consistent Information

Back 17

Can be compared over time because similar accounting methods have been applied

Front 18

Comparable Information

Back 18

Allows comparisons across businesses because similar accounting methods have been applied

Front 19

Guiding Principles for Communicating Useful Info

Back 19

Characteristics which along with the full-disclosure princple, guide the FASB in deciding what financial info should be reported:
- relevant info
- reliable info
- consistent info
- comparable info

Front 20

Material Amounts

Back 20

Amounts large enough to influence a user's decision

Front 21

Conversvatism

Back 21

Care should be taken not to overstate assets and revenues or understate liabilites and expenses

Front 22

Press Release

Back 22

A written public news announcement normally distributed to major news services

Front 23

Annual Reports include...

Back 23

1. Income statement, balance sheet, stockholders' equity or retained earnings statement, and cash flow statement
2. Related notes (footnotes)
3. report of Independent Accountants (Auditor's Opinion) if the statements are audited

Front 24

Annual reports of ____ ____ are more elaborate, both because of _________ and ________

Back 24

public companies; additional SEC reporting requirements; many companies use annual reports as public relations tools

Front 25

Management's Discussion and Analysis and Disclosures about Market Risks

Back 25

Element of "financial section" of annual report that includes explanation of key figures on the financial statements and the risks the company faces in the future

Front 26

"Nonfinancial" Section of Annual Reports

Back 26

First section which includes...
- a letter to stockholders from the Chairman and CEO
- descriptions of the company's management philosophy, products, successes
- exciting prospects and challenges for the future
- pretty pictures of products, facilities, and personnel

Front 27

Form 10-K

Back 27

Annual report that publicly traded companies must file with the SEC. Includes...
- detailed description fo business including products, prodcut development, sales and marketing, manufacturing, and competitors
- Lists properties owned or leases, legal proceedings, and signifcant contracts
- detailed schedules concerning bad debts, warranties, inventories, and advertising

Front 28

Form 10-Q

Back 28

Quarterly report that publicly traded companies must file with the SEC

Front 29

Form 8-K

Back 29

Used by publicly traded companies to disclose any material event not previously repoted that is important to investors

Front 30

Par Value

Back 30

A legal amount per share established by board of directors; establishes the minimum amount a stockholder must contribute and has no relationship tot he market price of stock

Front 31

Additional Paid-In Capital (Contributed Capital in Excess of Par)

Back 31

Amount of contributed capital less the par value of stock

Front 32

Common Stock

Back 32

Amount received in capital stock:
Number of Shares X Par Value per Share

Front 33

Gross Profit (Gross Margin)

Back 33

Net sales - COGS; manufacturing and merchandising companies must report this

Front 34

Income from Operations (Operating Income)

Back 34

- Gross Profit - Operating Expenses
- (Net Sales - COGS) - Operating Expense

Front 35

Income Before Income Taxes (Pretax Earnings)

Back 35

Revenues - Expenses (except income taxes)

Front 36

Nonoperating Items

Back 36

- Income
-Expenses
-Gains
- Losses
(that do not relate to the company's primary operations)

Front 37

Nonrecurring Items

Back 37

1, Discontinued Operations
2. Extraordinary Items

Front 38

Notes to Financial Statements

Back 38

1. Descriptions of key accounting rules applied to company's statements
2. Additional detail supporting reported numbers
3. Relevant financial information not disclosed on statements

Front 39

Voluntary Disclosures

Back 39

GAAP and SEC regulations set only the minimum level of required financial disclosures

Front 40

Goal of Financial Statement Analysis

Back 40

to evaluate company performance

Front 41

ROA

Back 41

Net Income / Average Total Assets

Front 42

Analysis of Return on Assets

Back 42

Measures how much the firm earned for each dollar of investment; broadest measure of profitability and management effectiveness, independent of financing strategy

Front 43

higher; investments

Back 43

Firms with _____ ROA are doing a better job of selecting and managing ______

Front 44

Profit Drivers/Profit Levers

Back 44

The two ways that management can improve ROA:
1. Net Profit Margin
2. Total Asset Turnover (efficiency)

Front 45

Net Profit Margin

Back 45

How much of every sales dollar is profit; net income / net sales; can be increased by:
a. increasing sales volume
b. increasing sales price
c. decreasing COGS and operating expenses

Front 46

Total Asset Turnover (efficiency)

Back 46

Net Sales / Average Total Assets; measures how many sales dollars the company generates with every dollar of assets. Can be increased by...
a. collecting accounts receivable more quickly
b. centralizing distribution to reduce inventory kept on hand
c. consolidating production facilities in fewer factories to reduce the amount of assets necessary to generate each dollar of sales

Front 47

Low-Cost Strategy

Back 47

Relies on efficient management of accounts receivable, inventory, and productive assets to produce high asset turnover

Front 48

High-Cost Strategy (Product-Differentiation Strategy)

Back 48

Relies on research, development, and promotion to convince customers of superiority/distinctiveness of products; charges higher prices

Front 49

Discontinued Operations

Back 49

result from the disposal of a major component of the business and are reported net or income tax effects

Front 50

Extraordinary Items

Back 50

Gains and losses that are both unusual in nature and infrequent in occurrence; reported net of tax on the income statement