Chapter 5

The Accounting Communication Process

* Players in the accounting communication
process: management, independent auditors,
information intermediaries, government
regulators, users

* Annual Reports

* SEC Reports
 5-3

Players in the Management

Management
Accounting Preparation
Preparation
Communication CEO,
CEO, CFO,
CFO, Accounting
Guided
Accounting Staff
Staff
Guided by
by GAAP
GAAP
Process

Independent
Independent Auditors
Auditors
Verification
Verification
Partners,
Partners, Managers,
Managers, Staff
Staff
Guided
Guided by
by GAAS
GAAS

An
An unqualified
unqualified opinion
opinion states
states
that
that the
the financial
financial statements
statements are are
fair
fair presentations
presentations in in all
all material
material
respects
respects in in conformity
conformity with
with
GAAP.
GAAP.
 5-5

Players in the Management

Management
Accounting Preparation
Preparation
CFO, CEO,
CEO, Accounting
Accounting Staff
Communication CFO,Guided Staff
Guided by
by GAAP
GAAP
Process

Independent
Independent Auditors
Auditors
Verification
Verification
Partners,
Partners, Managers,
Managers, Staff
Staff
Guided
Guided by
by GAAS
GAAS

Information
Information
Intermediaries
Intermediaries Web
Web Info
Info Services:
Financial
Financial analysts
Services:
analysts
Analysis
Analysis and
and Advice
Advice www/sec/gov
Financial make
makewww/sec/gov
predictions
predictions
Financial analysis,
analysis, www.compustat.com
Information
Information services www.compustat.com
concerning
services concerning
www.djnr.com
www.djnr.com
companies’
companies’ future
future
www.bloomberg.com
www.bloomberg.com
earnings
earnings and
and stock
stock
www.firstcall.com
www.firstcall.com
prices.
prices.
www.hoover.com
www.hoover.com
 5-6

Management
Management
Players in the Preparation
Preparation
Accounting CFO,
CFO, CEO,
CEO, Accounting
Accounting Staff
Staff
Communication Guided
Guided by
by GAAP
GAAP
Process
Independent
Independent Auditors
Auditors
Verification
Verification
Partners,
Partners, Managers,
Managers, Staff
Staff
Guided
Guided by
by GAAS
GAAS

Information
Information Government
Government
Intermediaries
Intermediaries Regulators
Regulators
Analysis
Analysis and
and Advice
Advice Verification
Verification
Financial
Financial analysis,
analysis, SEC
SEC Members
Members
Information
Information services
services Guided
Guided by
by SEC
SEC regs.
regs.

Users
Users
Analysis
Analysis and
and Decision
Decision
Investors,
Investors, Lenders,
Lenders, etc.
etc. Public
companies only
 5-9

Guiding Principles for Communicating

Useful Information
Primary
Primary Objective
Objective of
of External
External Financial
Financial Reporting
Reporting
To
To provide
provide economic
economic information
information to
to external
external users
users
for
for decision
decision making.
making.

Primary
Primary Qualitative
Qualitative Characteristics
Characteristics
Relevance:
Relevance: Timely
Timely and
and Predictive
Predictive Feedback
Feedback Value
Value
Reliability:
Reliability: Accurate,
Accurate, Unbiased,
Unbiased, and
and Verifiable
Verifiable

Secondary
Secondary Qualitative
Qualitative Characteristics
Characteristics
Comparability:
Comparability: Across
Across businesses
businesses
Consistency:
Consistency: Over
Over time
time
 5-4

Players in the Management

Management
Accounting Preparation
Preparation
CFO, CEO,
CEO, Accounting
Accounting Staff
Communication CFO,Guided Staff
Guided by
by GAAP
GAAP
Process

Independent
Independent Auditors
Auditors
Verification
Verification
Partners,
Partners, Managers,
Managers, Staff
Staff
Guided
Guided by
by GAAS
GAAS

Information
Information
Intermediaries
Intermediaries Financial
Financial analysts
analysts
Analysis
Analysis and
and Advice
Advice
Financial
Financial analysis,
analysis, make
make predictions
predictions
Information
Information services
services concerning
concerning
companies’
companies’ future
future
earnings
earnings and
and stock
stock
prices.
prices.
 5-10

Guiding Principles for Communicating

Useful Information
Primary
Primary Objective
Objective of
of External
External Financial
Financial Reporting
Reporting
To
To provide
provide economic
economic information
information to
to external
external users
users
for
for decision
decision making.
making.
The full -disclosure principles require . . .
full-disclosure
Primary
Primary Qualitative
Qualitative Characteristics
Characteristics
1. Relevance:
A complete
Relevance: Timely
set
Timely and
of financial
and Predictive
Predictive and
statements,
and Feedback
Feedback Value
Value
Reliability: and Unbiased,
Reliability: Accurate,
Accurate, Unbiased, and
and Verifiable
Verifiable
2. Notes to the financial statements
2.Notes
Secondary
Secondary Qualitative
Qualitative Characteristics
Characteristics
Comparability:
Comparability: Across
Across businesses
businesses
Consistency:
Consistency: Over
Over time
time
 5-14

Annual Reports

For
For privately
privately held
held companies,
companies, annual
annual reports
reports
are
are simple
simple documents
documents that that include:
include:
1. Four
1. Four basic
basic financial
financial statements.
statements.
2. Related
2. Related notes
notes (footnotes).
(footnotes).
3. Report
3. Report ofof independent
independent accountants
accountants
(auditor’s
(auditor’s opinion)
opinion) ifif the
the statements
statements areare
audited.
audited.
 5-15

Annual Reports

For
For public
public companies
companies,, annual
annual reports
reports are
are
elaborate
elaborate due
due to
to SEC
SEC reporting
reporting
requirements:
requirements:
1.
1. A
A Nonfinancial
Nonfinancial Section
Section

 A
A letter
letter to
to the
the stockholders,
stockholders, aa description
description of
of
management’s
management’s philosophy,
philosophy, products,
products,
successes,
successes, etc. etc.
2.
2. A
A Financial
Financial Section
Section

 See
See next
next slide
slide for
for aa detailed
detailed listing
listing .. .. ..
 5-16

Annual Reports - Financial Section

1.
1. Summarized
Summarized financial
financial
data
data for
for 55-- or
or 10 -years.
10-years.
2.
2. Management
Management Discussion
Discussion
and
and Analysis
Analysis (MD&A).
(MD&A). 6.
6. Recent
Recent stock
stock price
price
3. information.
information.
3. The
The four
four basic
basic financial
financial
statements.
statements. 7.
7. Summaries
Summaries of of the
the
4. unaudited
unaudited quarterly
quarterly
4. Notes
Notes (footnotes).
(footnotes).
financial
financial data.
data.
5.
5. Independent
Independent
Accountant’s 8.
8. Lists
Lists of
of directors
directors and
and
Accountant’s Report
Report and
and
the officers
officers of
of the
the company
company
the Management
Management
and
and relevant
relevant addresses.
addresses.
Certification.
Certification.
 5-17

Quarterly Reports

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
omitted.. Some notes to
the financial statements also may be omitted.
 5-18

SEC Reports

Form
Form 10 -K Annual
10-K Annual Report
Report
••Due
Due within
within 90
90 days
days ofof the
the fiscal
fiscal year -end.
year-end.
••Contains
Contains audited
audited financial
financial statements.
statements.

Form
Form 10 -Q Quarterly
10-Q Quarterly Report
Report
••Due
Due within
within 45
45 days
days of
of the
the end
end of
of the
the quarter.
quarter.
••Financial
Financial statements
statements can
can be
be unaudited.
unaudited.

Form
Form 88-K
-K Current
Current Report
Report
••Due
Due within
within 15
15 days
days of
of the
the major
major event
event date.
date.
••Financial
Financial statements
statements can
can be
be unaudited.
unaudited.
 Access an annual report
 You can visit
http://www.thecloroxcompany.com/investors/financ
 to access the Clorox Company annual report