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ACCT 1201 (75)
Chapter 5

Chapter 5 Condensed.docx

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ACCT 1201
Ronen Gal-or

Chapter 5 Condensed I. Players in theAccounting Communication Process II. Players in Corporate Governance Environment III. Disclosure Process IV. Review of Financial Statement Format and Contents V. Return onAssets (ROA), Profit Margin, and TotalAsset Turnover Ratios I. Players in theAccounting Communication Process A. Regulators (SEC, FASB, PCAOB, Stock Exchanges) – SEC oversees the FASB, PCAOB, and Stock Exchanges B. Managers (CEO, CFO,Accounting Staff) – Keep track of accounting records/ transactions, complete the 9 steps of the reporting process and compile financial statements II. Players in Corporate Governance Environment Corporate governance refers to the procedures designed to ensure that the company is managed in the interests of the shareholders A. Board of Directors (Audit Committee) - Responsible for maintaining the integrity of the company’s financial reports. B. Auditors - SEC requires publicly traded companies to have their statements and their control systems over the financial reporting process audited by an independent registered public accounting firm (independent auditor) following auditing standards established by the PCAOB C. Analysts - Earnings forecasts – predictions of earnings for future accounting periods D. Users - Institutional and Private Investors, Creditors III. Disclosure Process A. Press Releases – Quarterly andAnnual Earnings (Investor Reaction to Press Release vs. 10K) B. Annual Report (10K) … Contents for Public Companies 1. The four basic financial statements 2. Notes (footnotes) 1 C. Quarterly Report (10Q) D. Auditor Change, Merger, Major Divestiture (8K) IV. Review of Financial Statement Format and Contents A. Classified Balance Sheet – 2 B. Classified Income Statement Net Sales − Cost of goods sold Gross profit − Operating expenses (eg. SG&A, R&D) Income from operations +/− Nonoperating revenues/expenses and gains/losses and interest expense Income before income taxes − Income tax expense Net income Earnings Per Share Example: DW Roberts, a US Company sells industrial machinery and had the following balances in $US among other amounts on  their adjusted trial balance at December 31, 2011:   OR ­ Sales of Equipment                            380,200   Accounts Receivable                            90,000 PE ­ Loss on Sale of Building                        21,500   Last Expenses ­ Income Tax Expense                            45,700   EPS ­ Average Shares Outstanding                50,000   OE ­ General & Administrative Expense       25,700   OE ­ R&D Expenses              10,300   Property & Equipment                         350,000   PR ­ Rental Income                                      35,800   OE ­ Cost of Sales                                      224,500   PE ­ Interest Expense                                    6,615 PE – Peripheral Expense Prepare a classified income statement only in good form for the period ended 12/31/2011: 3 C. Statement of Stockholders’Equity – Statement of Retained Earnings included DW Roberts Multi Step Income Statement Year Ended 12/31/2011 Sales 380,000 Cost of Sales (COGS) (224,500) Gross Profit 155,700 (40%) Operating Expenses Selling, General andAdministrative Expense (25,700) Research and Development Expense (10,300) Total Operating Expenses (36,000) Income From Operations (119,700) Rental Income 35,800 Loss On Sales (21,500) Interest Expense (6,615) Income Before Income Taxes (127,385) Income Tax Expense (45,700) Net Income 81,685 EPS = 81,685/50,000 D. Statement of Cash Flows
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