Chapter 5 Communicating and Interpreting Accounting Information
Accounting 201 with Bokemeier at Michigan State University
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Additional Paid-In Capital (Paid-In Capital, Contributed Capital in Excess of Par)
The amount of contributed capital less the par value of the stock
CC - Par Value of Stock
Board of Directors
Elected by stockholders to represent their interests, is responsible for maintaining the integrity of the company's financial reports.
Comparable Information
Similar accounting methods have been applied across companies.
Conservatism
Principle taken to (1) avoid overstating assets and revenues and (2) understating liabilities and expenses
Consistent Information
Within a company similar accounting methods have been applied
Corporate Governance
The procedures designed to ensure that the company is managed in the interests of the shareholders.
Cost-Benefit Constraint
Suggests that the benefits of accounting for and reporting information should outweigh the costs.
Discontinued Operations (Nonrecurring Item)
Result from the disposal of a major component of the business and are reported net of income tax effects
Earnings Forecasts
Predictions of earnings for future accounting periods
Extraordinary Items (Nonrecurring Item)
Gains and losses that are both unusual in nature and infrequent in occurrence
-reported net of tax on the income statement
Form 8-K (Public/SEC)
Report of current events, discloses any material event not previously reported that is important to investors (auditor changes, merges)
Form 10-K (Public/SEC)
Annual Report
Provides a more detailed description of the business including its products, product development, sales and marketing, manufacturing and competitors. Lists properties owned or leased, any legal proceedings it is involved in, and significant contracts it has signed.
Form 10-Q (Public/SEC)
Quarterly Report
Gross Profit (Gross Margin)
Net Sales less cost of goods sold
Net Sales - Cost of Goods Sold
Income before Income Taxes (Pretax Earnings)
Revenues minus all expenses except income tax expense
Revenues - Expenses (except income tax expense)
Income from Operations (Operating Income)
Net Sales less cost of goods sold and other operating expense
Net Sales - Operating Expenses
Institutional Investors
Managers of pension, mutual, endowment, and other funds that invest on the behalf of others
Material Amounts
Amounts that are large enough to influence a user's decision.
Par Value
A legal amount per share established by the board of directors; establishes the minimum amount a stockholder must contribute and has no relationship to the market price of the stock
Press Release
A written public news announcement normally distributed to major news service (Apple)
Private Investors
Individuals who purchase shares in companies
Relevant Information
Timely and has predictive and/or feedback value
Reliable Information
Accurate, unbiased and verifiable
Unqualified (Clean) Audit Opinion
An auditor's statement that the financial statements are fair presentations in all material respects in conformity with GAAP
Return on Assets (ROA)
Measures how much the firm earned for each dollar of investment.
Net Income
Average Total Assets
Annual Reports (Private)
1. Four basic financial statements (IS, BS, RE and CF)
2. Related notes (footnotes)
3. Report of Independent Accountants (Auditor's Opinion) if statements are audited
Annual Reports (Public)
2 Sections
Non-Financial = Letter to Stockholders, description of company's management philosophy, products, successes and prospects, challenges for the future
Financial =
1. Summarized financial data for 5-10 year period
2. Management's discussion of financial condition
3. 4 basic financial statements
4. Notes
5. Auditor's Opinion
6. Recent stock price information
7. Summaries of unaudited quarterly financial data
8. Lists of directors and officers of the company and relevant addresses
Statement of Stockholders' Equity
Reports the changes in each of the company's stockholders' equity accounts during the period.
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