Copyright © 2016 Pearson Education, Inc. Chapter 1

Transcript:Copyright © 2016 Pearson Education, Inc. Chapter 1:
Copyright © 2016 Pearson Education, Inc. Chapter 1 Financial Statements: An Overview Map or Maze A map helps its user reach a desired destination through clarity of representation. A maze attempts to confuse its user by purposefully introducing conflicting elements and complexities that prevent reaching the desired goal. Financial statements have the potential for being both map and maze. Copyright © 2016 Pearson Education, Inc. 1-2 Financial Statements as a Map Form the basis for understanding the financial position of a firm Allow users to assess historical and prospective financial performance Present clear representations of a firm’s financial health Copyright © 2016 Pearson Education, Inc. 1-3 Financial Statements as a Maze Overwhelming amount of information Unreliable auditing Complex policies and reporting requirements Considerable discretion given to management Key information hidden or omitted Copyright © 2016 Pearson Education, Inc. 1-4 Map or Maze The main objectives of this book are to ensure that financial statements serve as a map, not a maze, demonstrate how to read and evaluate financial statements, provide the tools and techniques needed to complete a comprehensive financial statement analysis, and encourage intelligent decision making. Copyright © 2016 Pearson Education, Inc. 1-5 Map or Maze Usefulness of Information Financial position Success of operations Policies and strategies of management Insight into future performance Copyright © 2016 Pearson Education, Inc. 1-6 Map or Maze Volume of Information Financial statements Notes to the financial statements Auditor’s report Five-year summary of key financial data High and low stock prices Management’s discussion and analysis of operations Other material Copyright © 2016 Pearson Education, Inc. 1-7 Map or Maze Volume of Information Generally accepted accounting principles (GAAP) Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB) International Accounting Standards Board (IASB) Copyright © 2016 Pearson Education, Inc. 1-8 Map or Maze Figure 1.1 FASB/SEC Relationship FIGURE 1.1 FASB/SEC Relationship Copyright © 2016 Pearson Education, Inc. 1-9 Map or Maze Global Economy Need for international accounting standards Lack of SEC recommendation to adopt IFRS standards in the U.S. Text focuses on U.S. GAAP, however the analysis process illustrated can be applied to reports based on IFRS. Copyright © 2016 Pearson Education, Inc. 1-10 Map or Maze Where to Find a Company’s Financial Statements Form 10-K Filed annually with the SEC Same order for all filing companies Electronic Data Gathering, Analysis, and Retrieval (EDGAR) Copyright © 2016 Pearson Education, Inc. 1-11 Map or Maze Where