Accounting 300 Pratt Chapter 1 Financial Accounting

Nokia Internal Use Only

Types of Business Entities

Not for profit (Fund accounting)

For profit (Financial or GAAP accounting and managerial accounting)

Charities Municipalities Schools

All entities subject to IRS Code

Sole proprietorship Partnerships Corporations

2
Nokia Internal Use Only

Corporations

Ownership in corporations evidenced by shares of stock

If shares are traded on a stock exchange (i.e. available to anyone who wishes to be an owner) then company is public If shares of stock for a corporation are only available to private investors (i.e. venture capitalists, founders, etc.) then privately owned When a private company decides to go public it sells shares of stock to the general public for the first time, called an Initial Public Offering (IPO) Public companies sometimes go private, by buying up all the outstanding stock
3
Nokia Internal Use Only

Each share represents a fractional interest in the company. If there are 100 shares of stock, and you own 1, you own 1% of the company

Types of Investment

External funding comes from debt or equity

Internal funding is cash flow from the business

Debt (loan)

Bank loans Individuals loan money to companies by buying bonds Commercial Paper issued to other companies Individuals purchase ownership by buying stock Shareholders can make money two ways, via dividends and appreciation in the price of the stock.

Equity (ownership)

Combination instruments Convertible Bonds

4
Nokia Internal Use Only

Financial Reporting Users and Impact

Managers Investors Bankers Financial statements can impact the decisions made

Viability of the company; attract funds Careers and compensation of managers

5
Nokia Internal Use Only

Basic Financial Statements

Balance Sheet (I-49) at the end of the yr

Assets = Liabilities + Equity Snapshot at point in time Summary of revenues, cost of revenue and expenses Covers accounting period Summarizes increases and decreases in cash flow Covers accounting period Summarizes changes in equity, including net income (loss), capital activity and dividends Covers accounting period
6
Nokia Internal Use Only

Income Statement (I-48) through out the yr.

Statement of Cash Flow (I-50)

Statement of Stockholders Equity (I-51)

Fiscal Periods

All companies have a fiscal year, made up of 4 quarters Customary is a calendar year but does not have to be

Seasonality sometimes influences (e.g. Federated Department Stores / Macys / Bloomingdales January year end) Oracle May 31? Intel is calendar year end

Quarters can be 3 calendar months, or 13 weeks (4/4/5)

7
Nokia Internal Use Only

Independent Auditors Certified Public Accountants

Must pass written exam and have qualifying experience/coursework Multiple CPA firms, best known are Big 4:

Grant Thornton and BDO Siedman becoming larger Further consolidation unlikely CPA firms conduct annual audits for shareholders/companies Public companies must have audits

Ernst & Young Deloitte & Touche PricewaterhouseCoopers KPMG Peat Marwick

Private companies almost always banks / investors

8
Nokia Internal Use Only

Audited Financial Statements

Demand for external audit

Signed Audit Opinion (3 or 4 paragraphs) (I-105)

Public misconception not a guarantee

Financial statements are managements numbers and responsibility and audit performed Audit completed in accordance with auditing standards Audit opinion

Basic financial statements Footnotes - additional imp info Management Certifications (See Angel Intel Tab)
Nokia Internal Use Only

If significant changes in accounting policies occur must be highlighted in the audit opinion Audit opinion on internal controls (I-106)

Opinions are Unqualified (best), qualified (a particular contingency exists), or negative (disastrous to everyone)

Generally Accepted Accounting Principles

Commonly referred to as GAAP Used by all For Profit Entities (private or public) Helps ensure conformity and comparability

Involves estimates, use of judgment; not precise While working on better comparability, International GAAP is not the same for foreign companies (IFRS Summary Slide)

Very difficult to achieve because of differences in industries and practices

SEC accepting IFRS without reconciliation to GAAP for foreign filers; however US must still use GAAP Some subsidiaries of large US companies are adopting SEC suggested timetable for mandatory adoption starting 2014 10
Nokia Internal Use Only

Financial Accounting Standards Board

Commonly Referred to as FASB; Established 1973 Promulgates GAAP

Private Sector Entity Five Independent Full Time Board Members

Such standards are essential to the efficient functioning of the economy because investors, creditors, auditors, and others rely on credible, transparent, and comparable financial information

Issues Statements of Financial Accounting Standards (SFASs)-a total of 168 Statements issued Effective July 1, 2009, FASB adopted Codification and the use of Accounting Standards Updates (ASU) Public Hearing Process

Public accounting, academic and industry

Accounting for Stock Options

11
Nokia Internal Use Only

Securities and Exchange Commission (SEC)

Government agency responsible for overseeing public securities markets Has the power to prescribe accounting practices to be used by all public companies

Public Companies must file S-1 prior to an initial public offering (IPO); thereafter must file:

Delegated to FASB/PCAOB

Use of EDGAR

Annual statement (Form 10K) Quarterly statements (Form 10Q) Audited financial statements annually to shareholders (Annual Report) Proxy Statement, and hold annual shareholders meeting Disclose significant/unusual events or transactions (Form 8-K) Report Director and Officer stock transactions (Forms 3/4)

12
Nokia Internal Use Only

Corporate Governance Crisis of Confidence Sarbanes Oxley Act (SOX)

Backdrop of Enron / WorldCom / Arthur Andersen Adopted in 2002, SOX intended to enhance corporate governance and bolster investor confidence Requires CEO/CFO to certify a corporations financial statements (Intel Angel Tab) Management must also certify adequacy of internal controls, disclosure controls (Intel Angel Tab)

Auditors must audit management assessment (I-112) Audit Committee / Financial Experts CEO and Chairman role usually separated Independent Directors Annual performance evaluation
13
Nokia Internal Use Only

Board Corporate Governance

Public Company Accounting Oversight Board

Private sector, non profit corporation created by SOX to oversee auditors of public companies Some Supreme Court rulings but intact Generally seen as a good thing; close review of audit procedures and potential conflicts of interest Protect interests of investors Issues guidance relative to audits of internal controls Conducts annual audits of the auditors

Audit partners are very cognizant of these audits; significant part of annual performance review

They r called peecabo

14
Nokia Internal Use Only

Forprofit or not for profit all subjected to tax Reverse ipo. Make a public company private again. Board of directors decide if the company is under valued. Income best source of investment. Grant money is also good. Managers compensation is based on financial performace and to predict Future.

10Q - very important. Might come in exam. **** Assets = liablities + equaity. Very imp. *****
If Dividend goes down, assests and equity goes down. If the company wants to go public, they have to audit while private as well. **** Audit is not a guarantee ***

Ak form. Imp Proxy statement. - top 5 erners of company. Edger - tool to use to find company's financial analysis.

15
Nokia Internal Use Only