AC330 – Managerial Accounting for Business Professionals Kaplan University Online Unit 9 Seminar:...
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Transcript of AC330 – Managerial Accounting for Business Professionals Kaplan University Online Unit 9 Seminar:...
AC330 – Managerial Accounting for Business
Professionals
Kaplan University OnlineUnit 9 Seminar: September 26, 2012 9pm ET
Instructor: Dr. Tanae Wolo-Williams
Unit 9 Seminar Agenda
Unit 8 Review Unit 9 Assignments Chapter 14: Financial Statement Analysis Managerial Accounting Today (Annual Reports) Announcements Q&A
Statement of Cash FlowsShows where cash comes from and how it was usedReports cash receipts, cash payments, and net change in cash from operating, investing, and financing activities during a period
Unit 8 Review
Operating activities – includes cash effects of transactions that create revenue and expenses; determine net income
Investing activities – includes acquiring and disposing of investments and property, plant, and equipment and lending money and collecting the loans
Financing activities – obtaining cash from issuing debt and repaying the amounts borrowed; obtaining cash from stockholders, repurchasing shares, and paying dividends
Unit 8 Review (continued)
Unit 9 Assignments
Reading: Chapter 14 – Financial Statement Analysis: Click on Wiley Plus under the Unit 9 tab to pull up the chapter
Discussion: BYP14-7, Ethics Case, on pp. 696-697 of your textbook Initial post due Saturday Participation must occur on at least three separate
days during the week. Quiz – Under the Unit 9 tab, click on quiz (only
once). It is highly recommended that you review the chapter and materials before attempting the quiz (Due Tuesday)
Unit 9 Assignment (continued)
Assignment - To access the assignment, click on the Wiley Plus Assignment link under Course Home. You will respond to Chapter 14 assigned tasks: Chapter 14 Practice Quiz 1 and Unit 9 - Chap 14 – 2011. (Due Tuesday)
Seminar (Alternate Assignment) – if you miss the seminar, go to the Unit 9 tab and click on Seminar to get the alternate assignment
Chapter 14: Financial Statement Analysis
Financial Statement AnalysisInvolves evaluating three characteristics: a company’s liquidity, profitability, and solvencyShort-term creditors – interested in liquidity (ability of the borrower to pay obligations)Long-term creditors – interested in profitability and solvency (indicates the company’s ability to survive over a long period of time)Stockholders – interested in profitability and solvency (assess the likelihood of dividends and growth potential of the stock)
Need for Comparative Analysis
Every item reported in a financial statement has significance:
Intracompany basis Compares an item or financial relationship within a
company in the current year with the same item or relationship in one or more prior years
Industry averages Compares an item or financial relationship of a
company with industry averages (or norms) published by financial organizations such as Dun & Bradstreet
Need for Comparative Analysis(continued)
Intercompany basis Compares an item or financial relationship of
one company with the same item or relationship in one or more competing companies
Tools of Analysis
Horizontal analysis – evaluates a series of financial statement data over a period of time; used primarily for intercompany transactions
Vertical analysis – evaluates financial statement data by expressing each item in a financial statement as a percent of a base amount; used in both intra- and intercompany transactions
Ratio analysis – expresses the relationship among selected items of financial statement data; used in all three comparisons
Horizontal Analysis
Also called trend analysis Technique for evaluating a series of
financial statement data over a period of time
Purpose is determine the increase or decrease that has taken place
Expressed as an amount or a percentage
Horizontal Analysis of Changes Since Base Period
Example: Balance Sheet (Horizontal Analysis)
Vertical Analysis
Also called common-size analysis Technique that expresses each financial
statement item as a percent of a base amount
Example: Current assets are 22% of total assets – total assets being the base amount
Example: Vertical Analysis of Balance Sheet
Ratio Analysis
Expresses the relationship among selected items of financial statement data
Ratio expresses the mathematical relationship between one quantity and another
Use ratios to evaluate liquidity, profitability, and solvency
Liquidity Ratios
Measure short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash
Liquidity Ratios
Profitability Ratios
Measure the income or operating success of a company for a given period of time
Profitability Ratios
Solvency Ratios
Measure the ability of the company to survive over a long period of time
Solvency Ratios
Earning Power and Irregular Items
Earning Power – the normal level of income to be obtained in the future. Earning power differs from actual net income by the amount of irregular revenues, expenses, gains, and losses
Users are interested in earning power because it helps them determine future earnings without considering irregular items
Irregular Items – Discontinued Operations and Extraordinary Items
Reported after income tax on regular income; tax is listed for each of the listed irregular items is computed
Discontinued Operations
Disposal of a significant component of a business Stopping an entire activity or eliminating a major
class of customers Companies should report on its income statement
both income from continuing operations and income (loss) from discontinued operations
Income (loss) from discontinued operations consist of two parts:
Income (loss) from operations Gain (loss) on disposal of the segment
Example: Discontinued Operations
Extraordinary Items
Events and transactions that meet two conditions:Unusual in nature – unusual means that the item must be abnormal and only incidentally related to the company’s customary activitiesInfrequent in occurrence – infrequent means that the item should not be reasonably expected to recur in the foreseeable future
Examples:Effects of major natural causalities, if rare in the areaTakeover of property by a foreign governmentEffects of a newly enacted law or regulation, such as a property condemnation action
Extraordinary Items (continued)
Companies report extraordinary items net of taxes in a separate section of the income statement, immediately below discontinued operations.
Changes in Accounting Principle
Happens when the principle used in the current year is different from the one used in the preceding yearExample: Change in inventory costing methods – from FIFO to average costs
Companies report most changes in accounting principle retroactively; report both the current period and previous periods using the new principle
Allows companies to compare results across years; compare apples to apples
Comprehensive Income
Income statement - revenues, expenses, gains, and losses recognized during a period
However, over time, some specific exceptions have develop that allow companies to bypass reporting certain items on the income statement; reporting them directly to stockholders’ equity
Includes all changes to stockholders’ equity during a period except those resulting from investments by stockholders and distributions to stockholders
Comprehensive Income (continued)
Example: income from any unrealized gains and losses on available for sale securities are reported gains and losses on the balance sheet as adjustments to stockholders’ equity
Reduces the volatility of net income due to fluctuations in fair value
Informs the financial statement user of the gain or loss that would be incurred if the securities are sold at fair value
Quality of Earnings
Companies with high quality of earnings provide full and transparent information that will not confuse or mislead users of the financial statements
Issues surrounding quality of earnings have occurred because of recent accounting scandals: Some believe that companies are spending
too much time managing their earnings instead of managing their business
Factors affecting Quality of Earnings
Alternative accounting methodsVariations among companies in the application of generally accepted accounting principles (GAAP) may hinder comparability and reduce the quality of earnings
Example:
One company uses FIFO to value their inventory while another company in the same industry uses LIFOOther examples include differences in depreciation, depletion, and amortization
Factors affecting Quality of Earnings
Pro Forma IncomeExcludes items that the company thinks are unusual or nonrecurringCompanies generally can exclude any items they deem inappropriate for measuring their performanceMany analysts and investors are critical of this practice because they believe that the numbers often make the companies look better than they really are
Factors affecting Quality of Earnings
Improper RecognitionHappens when managers feel pressured to continually increase earnings; thus they manipulate earnings numbers to meet these expectationsMost common form used is improper recognition of revenue; use channel stuffing
Channel stuffing – offering deep discounts on their products to customers, companies encourage their customers to buy early (stuff the channel) rather than later
Factors affecting Quality of Earnings (continued)
Improper Capitalization of Operating ExpensesWorld Com - capitalized over $7 billion of operating expenses so that they would report positive net incomeEnron – failed to report all their liabilities; promised to make payments on certain contracts if financial difficulty developed, but these guarantees were not reported as liabilities
Managerial Accounting Today
The Management Discussion and Analysis section of an annual report addresses corporate performance for the year, and sometimes uses financial ratios to support its claims.
Go to: www.ibm.com/investor/help/ or go to www.wiley.com/college/weygandt
Managerial Accounting Today
Steps
1. From IBM’s Investor Help, choose How to read annual reports.
2. Choose Anatomy.
Instructions
Using the information from the above site, answer the following questions.
(a) What are the optional elements that are often included in an annual
report?
(b) What are the elements of an annual report that are required by the
SEC?
(c) Describe the contents of the Management Discussion.
(d) Describe the contents of the Auditors’ Report.
(e) Describe the contents of the Selected Financial Data.
Announcements
Wiley Plus Examples – posted in the Virtual Office
Next week is the final … no seminar All assignments (Units 7, 8, & 9) are due by
the last day of the term Final Exam (40 Multiple Choice Questions) &
Writing Assignment
Q&A
Questions & Answers