Libby Chap 5

Chapter 5Chapter 5The Accounting Communication ProcessThe Accounting Communication Process

* Players in the accounting communication process: management, independent auditors, information intermediaries, government regulators, users

* Annual Reports

* SEC Reports

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Players in the Accounting

Communication Process

An unqualifiedopinion states that the financial statements are fair presentations in all material

respects in conformity with GAAP.

An An unqualifiedunqualified opinion states opinion states that the financial statements are that the financial statements are fair presentations in all material fair presentations in all material

respects in conformity with respects in conformity with GAAP.GAAP.

Independent AuditorsVerification

Partners, Managers, StaffGuided by GAAS

Independent AuditorsIndependent AuditorsVerificationVerification

Partners, Managers, StaffPartners, Managers, StaffGuided by GAASGuided by GAAS

ManagementPreparation

CEO, CFO, Accounting StaffGuided by GAAP

ManagementManagementPreparationPreparation

CEO, CFO, Accounting StaffCEO, CFO, Accounting StaffGuided by GAAPGuided by GAAP

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Information Intermediaries

Analysis and AdviceFinancial analysis,

Information services

Information Information IntermediariesIntermediaries

Analysis and AdviceAnalysis and AdviceFinancial analysis, Financial analysis,

Information servicesInformation services

Financial analysts make predictions

concerning companies’ future earnings and stock

prices.

Financial analysts Financial analysts make predictions make predictions

concerning concerning companies’ future companies’ future earnings and stock earnings and stock

prices.prices.






CFO, CEO, Accounting StaffGuided by GAAP


CFO, CEO, Accounting StaffCFO, CEO, Accounting StaffGuided by GAAPGuided by GAAP

Web Info Services:www/sec/gov

www.compustat.comwww.djnr.com

www.bloomberg.comwww.firstcall.comwww.hoover.com

Web Info Services:Web Info Services:www/sec/govwww/sec/gov

www.compustat.comwww.compustat.comwww.djnr.comwww.djnr.com

www.bloomberg.comwww.bloomberg.comwww.firstcall.comwww.firstcall.comwww.hoover.comwww.hoover.com



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Government RegulatorsVerification

SEC MembersGuided by SEC regs.

Government Government RegulatorsRegulatorsVerificationVerification

SEC MembersSEC MembersGuided by SEC regs.Guided by SEC regs.

UsersAnalysis and DecisionInvestors, Lenders, etc.

UsersUsersAnalysis and DecisionAnalysis and DecisionInvestors, Lenders, etc.Investors, Lenders, etc. Public

companies only

















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Guiding Principles for Communicating Useful Information

Primary Objective of External Financial ReportingTo provide economic information to external users

for decision making.

Primary Objective of External Financial ReportingPrimary Objective of External Financial ReportingTo provide economic information to external users To provide economic information to external users

for decision making. for decision making.

Primary Qualitative Characteristics

Relevance: Timely and Predictive Feedback Value

Reliability: Accurate, Unbiased, and Verifiable

Primary Qualitative CharacteristicsPrimary Qualitative Characteristics

Relevance:Relevance: Timely and Predictive Feedback ValueTimely and Predictive Feedback Value

Reliability:Reliability: Accurate, Unbiased, and VerifiableAccurate, Unbiased, and Verifiable

Secondary Qualitative Characteristics

Comparability: Across businesses

Consistency: Over time

Secondary Qualitative CharacteristicsSecondary Qualitative Characteristics

Comparability:Comparability: Across businessesAcross businesses

Consistency:Consistency: Over timeOver time

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Financial analysts make predictions

concerning companies’ future earnings and stock

prices.

Financial analysts Financial analysts make predictions make predictions

concerning concerning companies’ future companies’ future earnings and stock earnings and stock

prices.prices.











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Guiding Principles for Communicating Useful Information

Primary Objective of External Financial ReportingTo provide economic information to external users

for decision making.

Primary Objective of External Financial ReportingPrimary Objective of External Financial ReportingTo provide economic information to external users To provide economic information to external users

for decision making.for decision making.

Primary Qualitative Characteristics

Relevance: Timely and Predictive and Feedback Value

Reliability: Accurate, Unbiased, and Verifiable

Primary Qualitative CharacteristicsPrimary Qualitative Characteristics

Relevance:Relevance: Timely and Predictive and Feedback ValueTimely and Predictive and Feedback Value

Reliability:Reliability: Accurate, Unbiased, and VerifiableAccurate, Unbiased, and Verifiable

Secondary Qualitative Characteristics

Comparability: Across businesses

Consistency: Over time

Secondary Qualitative CharacteristicsSecondary Qualitative Characteristics

Comparability:Comparability: Across businessesAcross businesses

Consistency:Consistency: Over timeOver time

The full-disclosure principles require . . .

1.A complete set of financial statements,and

2.Notes to the financial statements

The fullThe full--disclosure principles require . . .disclosure principles require . . .

1.1.A complete set of financial statements,A complete set of financial statements,andand

2.2.Notes to the financial statementsNotes to the financial statements

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Annual Reports

For privately held companies, annual reports are simple documents that include:

1. Four basic financial statements.

2. Related notes (footnotes).

3. Report of independent accountants (auditor’s opinion) if the statements are audited.

For For privatelyprivately held companies, annual reports held companies, annual reports are simple documents that include:are simple documents that include:

1.1. Four basic financial statements.Four basic financial statements.

2.2. Related notes (footnotes).Related notes (footnotes).

3.3. Report of independent accountants Report of independent accountants (auditor’s opinion) if the statements are (auditor’s opinion) if the statements are audited.audited.

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Annual Reports

For public companies, annual reports are elaborate due to SEC reporting

requirements:

1. A Nonfinancial Section A letter to the stockholders, a description of

management’s philosophy, products, successes, etc.

2. A Financial Section See next slide for a detailed listing . . .

For For publicpublic companiescompanies, annual reports are , annual reports are elaborate due to SEC reporting elaborate due to SEC reporting

requirements:requirements:

1.1. A Nonfinancial SectionA Nonfinancial Section A letter to the stockholders, a description of A letter to the stockholders, a description of

management’s philosophy, products, management’s philosophy, products, successes, etc.successes, etc.

2.2. A Financial SectionA Financial Section See next slide for a detailed listing . . . See next slide for a detailed listing . . .

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Annual Reports - Financial Section

1. Summarized financial data for 5- or 10-years.

2. Management Discussion and Analysis (MD&A).

3. The four basic financial statements.

4. Notes (footnotes).5. Independent

Accountant’s Report and the Management Certification.

1.1. Summarized financial Summarized financial data for 5data for 5-- or 10or 10--years.years.

2.2. Management Discussion Management Discussion and Analysis (MD&A).and Analysis (MD&A).

3.3. The four basic financial The four basic financial statements.statements.

4.4. Notes (footnotes).Notes (footnotes).5.5. Independent Independent

Accountant’s Report and Accountant’s Report and the Management the Management Certification.Certification.

6. Recent stock price information.

7. Summaries of the unaudited quarterly financial data.

8. Lists of directors and officers of the company and relevant addresses.

6.6. Recent stock price Recent stock price information.information.

7.7. Summaries of the Summaries of the unaudited quarterly unaudited quarterly financial data.financial data.

8.8. Lists of directors and Lists of directors and officers of the company officers of the company and relevant addresses.and relevant addresses.

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Quarterly Reports

Usually begin with short letter to stockholders

Condensed unaudited income statement and balance sheet for the quarter.

Often, cash flow statement and statement of stockholders’ equity are omitted. Some notes to the financial statements also may be omitted.

Usually begin with short letter to stockholdersUsually begin with short letter to stockholders

Condensed Condensed unauditedunaudited income statement and income statement and balance sheet for the quarter.balance sheet for the quarter.

Often, cash flow statement and statement of Often, cash flow statement and statement of stockholders’ equity are stockholders’ equity are omittedomitted. Some notes to . Some notes to the financial statements also may be omitted.the financial statements also may be omitted.

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SEC Reports

Form 10-K Annual Report•Due within 90 days of the fiscal year-end.•Contains audited financial statements.

Form 10Form 10--K Annual ReportK Annual Report••Due within 90 days of the fiscal yearDue within 90 days of the fiscal year--end.end.••Contains audited financial statements.Contains audited financial statements.

Form 10-Q Quarterly Report•Due within 45 days of the end of the quarter.•Financial statements can be unaudited.

Form 10Form 10--Q Quarterly ReportQ Quarterly Report••Due within 45 days of the end of the quarter.Due within 45 days of the end of the quarter.••Financial statements can be unaudited.Financial statements can be unaudited.

Form 8-K Current Report•Due within 15 days of the major event date.•Financial statements can be unaudited.

Form 8Form 8--K Current ReportK Current Report••Due within 15 days of the major event date.Due within 15 days of the major event date.••Financial statements can be unaudited.Financial statements can be unaudited.

Access an annual report Access an annual report

You can visit http://www.thecloroxcompany.com/investors/financialinfo/annreports/index.html

to access the Clorox Company annual report

Documents

Libby Chap 5