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8/12/2019 Ch 3 - The Statement of Financial Position and Financial Disclosures
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THE STATEMENT OF
FINANCIAL POSITION AND
FINANCIAL DISCLOSURES
Chapter 3
2013 The McGraw-Hill Companies, Inc.
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Slide 2
Coverage
LO(Learning Objective)5,6,7
Page 121-129
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Slide 3
Basic Principles or Underlying Guidelines ofAccounting
Including:4 Qualities
4 Principles
2 Constraints
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Slide 4
4 Qualities: GAAP identifymajor characteristics of
information
Relevant Information Affects the decision of its users.
Reliable Information Is trusted by users.
ComparableInformation
Is helpful in contrastingorganizations.
C5
Consistent
Information
requires a company to use the sameaccounting methods period after period
so that financial statements arecomparable across periods
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Slide 5
4 PRINCIPLES OF ACCOUNTING
Cost PrincipleAccounting information is based on
actual cost. Actual cost isconsidered objective.
Revenue Recognition PrincipleRecognize revenue when it is earned.
Matching PrincipleA company must record its expenses
incurred to generate the revenue reported.
Full Disclosure PrincipleA company is required to report thedetails behind financial statementsthat would impact users decisions.
C5
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Slide 6
Concept of materiality: An item is
material if knowledge of the item might
reasonably influence the decisions of usersof financial statements.
2 CONSTRAINTS:CONSTRAINT 1: MATERIALITY
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Slide 7
GOODS DAMAGED OROBSOLETE(chapter 6)
Example of application or use of conservatism inaccounting: assets valuation and write-off
C 1 2 CONSTRAINTS:CONSTRAINT 2: CONSERVATISM
Concept of CONSERVATISM (is also known
as PRUDENCE concept): the general concept ofrecognizing expensesand liabilitiesas soon as possible
when there is uncertainty about the outcome, but to onlyrecognize revenuesand assetswhen they are assured of
being received.
http://www.accountingtools.com/definition-expensehttp://www.accountingtools.com/definition-liabilityhttp://www.accountingtools.com/definition-revenuehttp://www.accountingtools.com/definition-assethttp://www.accountingtools.com/definition-assethttp://www.accountingtools.com/definition-revenuehttp://www.accountingtools.com/definition-liabilityhttp://www.accountingtools.com/definition-expense8/12/2019 Ch 3 - The Statement of Financial Position and Financial Disclosures
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3-8
Learning Objective 5
Explain the purposeof financial statementdisclosures
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Disclosure Notes
What is the basic accounting principle guidingthe Disclosure Notes?
Any constraint of this accounting principle?
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Disclosure Notes
1.Summary ofSignificant
Accounting Policies
Conveys valuable informationabout the companys choices from
among various alternative
accounting methods. *
2.Subsequent EventsA signi ficant development thattakes place after the companys
financial year-end but before the
financial statements are issued.
3. Noteworthy Events
and Transactions
Transactions or events that are
potentially important to evaluating
a companys f inancial statements
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2. Subsequent Events
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2. Subsequent Events
Example 1: Wal-Mart Stores, Inc.: DividendsDeclared
On March 3, 2011, our Board of Directorsapproved an increase in the annual dividend for
fiscal 2012 to $1.46 per share, an increase ofapproximately 21% over the dividends paid infiscal 2011. Dividends per share were $1.21and $1.09 in fiscal 2011 and 2010, respectively.For the fiscal year ending January 31, 2012, theannual dividend will be paid in four quarterlyinstallments.
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2. Subsequent Events
Example 2: Earthquake in Japan On March 11, 2011, an earthquake of 9.0 magnitude
occurred near the Northeastern coast of Japan,creating extremely destructive tsunami waves. The
earthquake and tsunami waves caused extensivedamage in Northeastern Japan and also affected otherregions in Japan through a lack of electricity, water andtransportation. We are currently unable to estimate thevalue of damages and the corresponding insurancerecovery regarding our business in Japan, although wedo not believe that any damages would be material toour financial position.
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2. Discussion:
Accounting of Subsequent Events
Situation 1: The IASB requires that companiesadjust the reported amount of assets andliabilities (in the financial statements table) ifevents occurring after the balance sheet date
provide additional information about conditionsthat existed at the balance sheet date.
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2. Discussion:
Accounting of Subsequent Events
Situation 2: Disclosure Notes should bemade of significant subsequent events even ifthose events do not impact the valuationsreported in the balance sheet.
Situation 3: No need of Disclosure Notes fornon-significant subsequent events
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2. Subsequent Events--Discussion
Which situation is the following subsequentevents?
Major customer went bankrupt due to adeteriorating financial condition
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2. Subsequent Events--Discussion
Which situation is the following subsequentevents?
Company sustained extensive hurricanedamage to one of its plants
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2. Subsequent Events--Discussion
Which situation is the following subsequentevents?
Company lost a major lawsuit that had beenpending for two years
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2. Subsequent Events--Discussion
Which situation is the following subsequentevents?
Increasing U.S. trade deficit may have impacton companys overseas sales.
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2. Subsequent Events--Discussion
Which situation is the following subsequentevents?
Company sold a large block of preferred stock
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2. Subsequent Events--Discussion
Which situation is the following subsequentevents?
Companys controller resigned and wasreplaced by an audit manager from thecompanys audit firm
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3. Noteworthy Events and Transactions
Transactions or events that are potentiallyimportant to evaluating a companys
financial statements, including:
1. related-party transactions
2. errors, and fraud
3.Any important information not included in
the financial statements tables, e.g.,
additional information to support summarytotals; contingent liability; segment
information
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3. Noteworthy Events and Transactions
Related-Party Transactions DisclosureRelated-party transactions require disclosure of thenature of the relationship, a description of thetransaction, and any dollar amounts involved .
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Example of Notes of Related-Party TransactionsDisclosure-- GlaxoSmithKline plc
GSK held a 18.1% interest in Quest Diagnostics Inc. at 31stDecember 2010 (2009 16.8%). The Group and QuestDiagnostics are parties to a long-term contractual relationshipunder which Quest Diagnostics is the primary provider of clinicallaboratory testing to support the Groups clinical trials testingrequirements worldwide.
During 2010, Quest Diagnostics provided services of 41 million(2009 47 million) to the Group. At 31st December 2010, thebalance payable by GSK to Quest Diagnostics was 10 million(2009 10 million).
Subsequent to the year-end, GSK sold its entire shareholding inQuest Diagnostics Inc. The sale comprised a secondary publicoffering and an accompanying repurchase of shares by QuestDiagnostics which together are expected to generate grossproceeds of 0.7 billion after tax.
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3. Noteworthy Events and Transactions
Errors, and Fraud
Both result in misstatement in financialstatements.
What is the main difference between Errors andFraud?
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3. Noteworthy Events and Transactions
Additional information to support summarytotals, e.g.
Breakdown of property, plant, and equipment (PPE), long-term
debt Main difference between financial accounting income and tax
income
Notes of long-term leases: length of the lease and future payments
Pension plan and plan for coverage of medical benefits
Slide 27
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Slide 27
Probability of future sacrifice . . .
ReasonablyProbable Possible Remote
Record the Disclose the
Can be contingent liabi lity in the No
Estimated liability. notes to the action.
financial stmts.
Disclose the Disclose the
Cannot be l iabi l ity in the l iabi l ity in the No
Estimated notes to the notes to the action.financial stmts. financial stmts.
Amou
nt...
3. Noteworthy Events and
Transactions
Contingent Liabilities: Potential obligation that depends on afuture event arising out of a past transaction or event, e.g.,Potential Legal Claims, Debt Guarantees
C 3
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3. Noteworthy Events and Transactions
Segment Information
Firm should disclose geographic segmentinformation and segment information of major
product or customer
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3-29
Learning Objective 6
Explain the purpose of
the managementdiscussion andanalysis disclosure.
Slide 30
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Management Discussion and Analysis
Provides a biased but
informed perspective ofa companys operations,
liquidity, and capital
resources.
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Managements Responsibilities
Preparing the financial statements and otherinformation in the annual report.
Included in annual reports to assert theresponsibility of management and directors
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3-32
Learning Objective 7
Explain the purpose of
an audit and describethe content of theaudit report.
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AuditorsReport
Expresses the auditorsopinionas to the fairness of
presentation of the financial
statements in conformity withaccounting standards.
Must comply with the auditingstandards of the specificjurisdictions over which the
company operates.
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AuditorsOpinions
Unqualified
Issued when the financial statements
present fairly the financial posi tion,
results of operations, and cash flowsare in conformity with accounting
standards.
Qualified
Issued when there is an exception
to the standard unqualified opinion
but is not of sufficient seriousnessto invalidate the financial
statements as a whole.
AdverseIssued when the exceptions are so
serious that a qualified opinion is
not justi fied.
DisclaimerIssued when there is insufficient
information on which to express an
opinion.
Slide 35
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Compensation of Directors & Top Executives
Disclosure Directors remuneration
Remuneration policies and
practicesAuditors report on remuneration
policies
In the U.S., a proxy statementissent each year to all shareholders,
usually in the same mailing with the
annual report.
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Homework
Discussion Questions (no need to hand in)
E3-10
E3-11
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End of Chapter 3
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