Kế toán, kiểm toán - Chapter 10: Explanatory notes and other financial information

CHAPTER 10EXPLANATORY NOTES AND OTHER FINANCIAL INFORMATIONMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objectives Are the explanatory notes an integral part of the financial statements? Do the notes provide detailed disclosure needed by users wishing to gain a full understanding of the financial statements?What are the kinds of significant accounting policies that are explained in the notes?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objectives What are the nature and content of disclosures relating to accounting changes, business combinations, contingencies and commitments, events subsequent to the balance sheet date, impact of inflation, and segment information?What is the role of the Securities and Exchange Commission, and what are some of its reporting requirements?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objectives Why is a statement of management’s responsibility included with the notes?What is the significance of management’ discussion and analysis of the firm’s financial condition and results of operations?What is included in the five-year (or longer) summary of financial information?What are the meaning and content of the independent auditor’s report?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 1Are the explanatory notes an integral part of the financial statements? Do the notes provide detailed disclosure needed by users wishing to gain a full understanding of the financial statements?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002General OrganizationThe explanatory notes refer to specific items in the financial statementsThe financial statement sequence is usually as follows:Income statementBalance SheetStatement of cash flowsThe placement of the statement of changes in owners’ equity depends on the complexity of the statementMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Explanatory NotesFull disclosure requires that firms report all information necessary for a reasonably astute user not to be misledExplanatory notes generally require more pages than the statements themselvesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 2What are the kinds of significant accounting policies that are explained in the notes?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Significant Accounting PoliciesManagement may choose from a number of choices among generally accepted accounting practicesEach firm must disclose the policies chosenDisclosure enables users to make intelligent comparisons among firmsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Types of Significant Accounting PoliciesDepreciation method – method used and useful lives are disclosedInventory valuation method – methods for each category of inventory are disclosed. If LIFO used, the difference between it and what inventory would have been under FIFO is disclosedBasis of consolidation – discloses which subsidiaries are consolidated, if anyMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002More Types of Significant Accounting PoliciesIncome taxes – a reconciliation of the statutory rate and the effective tax rate is provided. An explanation of deferred taxes also is includedEmployee benefits – the cost of employee benefit is disclosed, along with actuarial assumptionsAmortization of intangible assets – method of amortization is disclosedMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002More Types of Significant Accounting PoliciesEarnings per share of common stock – an explanation of the calculation is providedStock option and stock purchase plans – officers and key employees are given the right to purchase stock at some time in the future. Details of such plans are providedMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Details of Other Financial Statement AmountsMay include the amount of research and development expensesMay include what items are included in the “other income” categoryDetails of long-term debt may be providedDetails of other costs and expensesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 3What are the nature and content of disclosures relating to accounting changes, business combinations, contingencies and commitments, events subsequent to the balance sheet date, impact of inflation, and segment information?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Other DisclosuresAccounting change – a change in accounting principle that has a material effect on the comparability of the current period with prior periods. Example: changing from FIFO to LIFOBusiness combinations – the effect on the financial statements from mergers, acquisitions, or dispositions will be reportedMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002More DisclosuresContingencies and commitments – firms involved in lawsuits must disclose the facts of the lawsuit. Must also disclose if a guarantor of the indebtedness of another entityEvents subsequent to the balance sheet date – a significant event that will materially impact the financial statement s must be disclosedMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002More DisclosuresImpact of inflation – a firm must report the effect of inflation on the financial statementsSegment information – must disclose line of business and geographic segment operating profit, capital expenditures, depreciation and amortization, identifiable assets, and sales to unaffiliated customersMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 4What is the role of the Securities and Exchange Commission, and what are some of its reporting requirements?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Reporting to the Securities and Exchange CommissionThe SEC was created to administer securities lawsSecurities that are offered for sale to more than a few investors must be registered with the SECA prospectus is provided to investors prior to their purchase of securitiesFirms must file annual reports, 10-Ks, with the SECMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 5Why is a statement of management’s responsibility included with the notes? McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Management’s Statement of ResponsibilityExplains that the responsibility for the financial statements lies with the management of the firmUsually refers to the firm’ internal control, the internal audit function, the audit committee of the board of directors, and other ethical conduct mattersMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 6What is the significance of management’ discussion and analysis of the firm’s financial condition and results of operations?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Management’s Discussion and AnalysisA discussion by management of the firm’s activities during the year, its financial condition, and the results of operationsRequired by the SEC in annual reports to them, but now included in most firm’s annual reports to stockholdersMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 7What is included in the five-year (or longer) summary of financial information?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Five-Year (or Longer) Summary of Financial DataIncludes key income statement dataIncludes significant ratios such as earnings as a percent of salesIncludes earnings and dividends per shareMay include stock pricesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 8What are the meaning and content of the independent auditor’s report?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Independent Auditors’ ReportBrief (usually three paragraphs) reportUsually addressed to board of directors and stockholdersIdentifies the statements that were auditedDescribes the nature and extent of the auditors’ workContains an opinion about fair presentationContains the name of the audit firm and a signatureMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Financial Statement CompilationsA report that states that the financial statements have not been auditedDoes not provide any assurance as to the fairness of the financial statementsLess costly than an auditMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002