Chapter3–LectureOutline–OverviewofAccounting.docVIP

Chapters 3 and 4 – Accounting Analysis Key Learning Outcomes: Develop an understanding of the institutional environment and framework under which financial reporting standards are set, monitored and enforced. This (potentially) provides the analyst an “intuitive” foundation to understand the purpose, philosophy, potential benefits and pitfalls of information presented in financial reports. Understand what is meant by quality of accounting information. Identify factors that enhance and limit the quality of financial reports. Develop qualitative and quantitative methods to measure and evaluate the quality of financial information (financial statements). You will have the tools to perform as sound and structured accounting analysis. An appreciation for the potential value created by a proper accounting analysis will be gained. Be able to explicitly link the focus of an accounting analysis to the outcomes of the five forces industry classification and identification of key success factors (Value Drivers, items that yield competitive advantages. A. The Financial Reporting Framework 1. Elements of the Financial Report Management Discussion and Analysis Section Income Statement Balance Sheet Statement of Cash Flows Footnotes to Financial Statements Audit Opinion 2. Five Accounting Building Blocks (Conceptual Definitions) Revenues Expenses Assets Liabilities Equity (legal and bankruptcy perspective) Responsibility for Accounting Choices by the Firm CEO vs. CFO vs. Controller vs. Board of Directors Post Sarbannes-Oxley holds all parties responsible 4. Responsibility for Setting Accounting Standards SEC (legal authority) FASB (delegated authority in US) IASB (accounting law in some countries; not US) 5. Purpose and Limitations of Audits Ensure general compliance with GAAP Assess system of internal control Improves quality and credibility of financial statement data Is not designed to detect fraud Audit Failure - Unintentional Negligence or Inability to detect departur