MGTB05 Chapter 6 Notes

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Financial Accounting
Daga Sandra

MGTB05 Financial Accounting I Chapter 6—Communicating and Interpreting Accounting Information Understanding the Business  corporate governance refers to the procedures designed to ensure that the company is managed in the interests of the shareholders Players in the Accounting Communication Process Regulators (CSA, AcSB, AASB, Stock Exchanges)  all financial information reported by Canadian companies is subject to strict regulations and standards issued by government regulators and private standard-setting organizations as well as external audits  stock exchanges also survey the reporting and trading activities of companies and can undertake independent investigations or other agencies to address possible fraudulent reporting Managers (CEO, CFO and Accounting Staff)  the CEO and CFO, as the highest officers in a company, must personally certify that each report filed with provincial securities commission does not contain untrue material statements or omit material facts, includes no significant deficiencies or material weaknesses in the internal controls and have disclosed any weaknesses in internal control of management fraud to auditors  the members of the accounting staff have a professional responsibility for the accuracy of this information Board of Directors (Audit Committee)  the board of directors, elected by the shareholders to represent their interests, is responsible for maintaining the integrity of the company’s financial statements  the audit committee of the board which is composed of non-management independent directors is responsible for hiring the company’s independent auditors Auditors  all public firms are required to be have their financial statements audited by professional independent accountants  an unqualified (clean) audit opinion is an auditors’ statement that the financial statements are fair presentations in all material aspects in conformity with Canadian Auditing Standards  an audit adds credibility to the statements and reduces the risk that the company’s condition is misrepresented in the statements Information Intermediaries: Analysts and Information Services  financial analyst reports generally include forecasts of share price and future quarterly and annual earnings per share; a buy, sell or hold recommendation for the company shares and explanations for these judgments  financial analysts tend to make optimistic earnings forecasts to maintain good relationships with the company’s management from which they get a great deal of their information, this puts added pressure on management to meet and exceed analysts’ forecasts to please investors  analysts draw their information from a number of information services sites such as SEDAR, individual company websites, Compustat, Bloomberg, the Globe and Mail, etc. Users: Institutional and Private Investors, Creditors, and Others  institutional investors are managers of pension funds, mutual funds, endowment funds and other funds that invest on behalf of others, control the majority of publicly traded shares  private investors include individuals who purchase shares in companies  lenders (creditors) include suppliers and financial institutions that lend money to companies, institutional and private investors also become creditors when they buy a company’s publicly traded bonds and debentures  customers evaluate the financial health of suppliers to determine whether they will be reliable, up-to- date sources of supply while suppliers evaluate their customers to estimate their future needs and ability to pay debts The Disclosure Process Press Releases  most public companies announce quarterly and annual earnings through a press release (a written public news announcement normally distributed to major news services) as soon as audited figures are available a couple of weeks after the end of the accounting period  when the actual earnings are published the market reacts quickly to not only the amount of earnings but to the difference between actual earnings and expected earnings (difference is unexpected earnings) Annual Reports  annual report is split into two sections:  non-financial—includes letter to shareholders from chairperson and CEO, descriptions of company’s management philosophy, products, successes, exciting prospects and challenges and photographs of facilities, personnel and products, etc)  financial—summarized financial data for 5- or 10-year period, management’s discussion and analysis, basic financial statements, notes, report of independent accountant (auditor’s opinion), recent stock price info, summaries of unaudited quarterly financial data, list of directors and office
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