Accounting Standards: The financial statements of a business must confirm the generally accepted accounting principles (GAAP). This term refers to various methods, rules, practices and procedures developed over the times based on need for regulating the preparation of financial statements; these principles have been developed in response to changes in the business environment. The process of developing is jointly carried out by various groups such as Financial Accounting Standards Board. American Institute of Certified Public Accountants, Certified Public Accountants, and Securities and Exchange Commission.
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Financial Accounting: The Impact on Decision Makers
- Effect of Industry Characteristics on Financial Statement Relations. Effective financial statement analysis requires an understanding of a firms economic characteristics. The relations between various financial statement items provide evidence of many of these economic characteristics. Exhibit 1.23 (pages 6263) presents common-size condensed balance sheets and income statements for 12 firms in different industries. These common-size balance sheets and income statements express various items as a percentage of operating revenues. (That is, the statement divides all amounts by operating revenues for the year.) Exhibit 1.23 also shows the ratio of cash flow from operations to capital expenditures. A dash for a particular financial statement item does not necessarily mean the amount is zero. It merely indicates that the amount is not sufficiently large for the firm to disclose it. A list of the 12 companies and a brief description of their activities follow. A. Abercrombie Fitch: Sells retail apparel primarily through stores to the fashionconscious young adult and has established itself as a trendy, popular player in the specialty retailing apparel industry. B. Allstate Insurance: Sells property and casualty insurance, primarily on buildings and automobiles. Operating revenues include insurance premiums from customers and revenues earned from investments made with cash received from customers before Allstate pays customers claims. Operating expenses include amounts actually paid or expected to be paid in the future on insurance coverage outstanding during the year. C. Best Buy: Operates a chain of retail stores selling consumer electronic and entertainment equipment at competitively low prices. D. E. I. du Pont de Nemours: Manufactures chemical and electronics products. E. Hewlett-Packard: Develops, manufactures, and sells computer hardware. The firm outsources manufacturing of many of its computer components. F. HSBC Finance: Lends money to consumers for periods ranging from several months to several years. Operating expenses include provisions for estimated uncollectible loans (bad debts expense). G. Kelly Services: Provides temporary office services to businesses and other firms. Operating revenues represent amounts billed to customers for temporary help services, and operating expenses include amounts paid to the temporary help employees of Kelly. H. McDonalds: Operates fast-food restaurants worldwide. A large percentage of McDonalds restaurants are owned and operated by franchisees. McDonalds frequently owns the restaurant buildings of franchisees and leases them to franchisees under long-term leases. I. Merck: A leading research-driven pharmaceutical products and services company. Merck discovers, develops, manufactures, and markets a broad range of products to improve human and animal health directly and through its joint ventures. J. Omnicom Group: Creates advertising copy for clients and is the largest marketing services firm in the world. Omnicom purchases advertising time and space from various media and sells it to clients. Operating revenues represent commissions and fees earned by creating advertising copy and selling media time and space. Operating expenses includes employee compensation. K. Pacific Gas Electric: Generates and sells power to customers in the western United States. L. Procter Gamble: Manufactures and markets a broad line of branded consumer products. REQUIRED Use the ratios to match the companies in Exhibit 1.23 with the firms listed above.arrow_forwardEffect of Industry Characteristics on Financial Statement Relations. Effective financial statement analysis requires an understanding of a firms economic characteristics. The relations between various financial statement items provide evidence of many of these economic characteristics. Exhibit 1.22 (pages 6061) presents common-size condensed balance sheets and income statements for 12 firms in different industries. These common-size balance sheets and income statements express various items as a percentage of operating revenues. (That is, the statement divides all amounts by operating revenues for the year.) Exhibit 1.22 also shows the ratio of cash flow from operations to capital expenditures. A dash for a particular financial statement item does not necessarily mean the amount is zero. It merely indicates that the amount is not sufficiently large enough for the firm to disclose it. Amounts that are not meaningful are shown as n.m. A list of the 12 companies and a brief description of their activities follow. A. Amazon.com: Operates websites to sell a wide variety of products online. The firm operated at a net loss in all years prior to that reported in Exhibit 1.22. B. Carnival Corporation: Owns and operates cruise ships. C. Cisco Systems: Manufactures and sells computer networking and communications products. D. Citigroup: Offers a wide range of financial services in the commercial banking, insurance, and securities business. Operating expenses represent the compensation of employees. E. eBay: Operates an online trading platform for buyers to purchase and sellers to sell a variety of goods. The firm has grown in part by acquiring other companies to enhance or support its online trading platform. F. Goldman Sachs: Offers brokerage and investment banking services. Operating expenses represent the compensation of employees. G. Johnson Johnson: Develops, manufactures, and sells pharmaceutical products, medical equipment, and branded over-the-counter consumer personal care products. H. Kelloggs: Manufactures and distributes cereal and other food products. The firm acquired other branded food companies in recent years. I. MGM Mirage: Owns and operates hotels, casinos, and golf courses. J. Molson Coors: Manufactures and distributes beer. Molson Coors has made minority ownership investments in other beer manufacturers in recent years. K. Verizon: Maintains a telecommunications network and offers telecommunications services. Operating expenses represent the compensation of employees. Verizon has made minority investments in other cellular and wireless providers. L. Yum! Brands: Operates chains of name-brand restaurants, including Taco Bell, KFC, and Pizza Hut. REQUIRED Use the ratios to match the companies in Exhibit 1.22 with the firms listed above.arrow_forwardThe following article appeared in the Wall Street Journal. Washington—The Securities and Exchange Commission staff issued guidelines for companies grappling with the problem of dividing up their business into industry segments for their annual reports. An industry segment is defined by the Financial Accounting Standards Board as a part of an enterprise engaged in providing a product or service or a group of related products or services primarily to unaffiliated customers for a profit. Although conceding that the process is a “subjective task” that “to a considerable extent, depends on the judgment of management,” the SEC staff said companies should consider … various factors … to determine whether products and services should be grouped together or reported as segments. Instructions What does financial reporting for segments of a business enterprise involve? Identify the reasons for requiring financial data to be reported by segments. Identify the possible disadvantages of requiring…arrow_forward
- Financial statements and reports What happened to assets, earnings, dividends, and cash flows during the financial year? Accounting practice in the United States follows the generally accepted accounting principles (GAAP) developed by the Financial Accounting Standards Board (FASB), which is a nongovernmental, professional standards body that monitors accounting practices and evaluates controversial issues. The Securities and Exchange Commission (SEC) requires all publicly traded companies to periodically report their financial information. A publicly held corporation must publish an annual report that contains the balance sheet, income statement, statement of cash flows, statement of stockholders’ equity, and other financial information for analysis. The following table lists descriptions of the major financial statements and reports that a firm publishes. Identify the correct statement or report for each description. Description Statement or Report Explains the…arrow_forwardWhat is the purpose of Regulation S–K? Choose the correct.a. Defines generally accepted accounting principles in the United States.b. Establishes required disclosure of nonfinancial information with the SEC.c. Establishes required financial disclosures with the SEC.d. Indicates which companies must file with the SEC on an annual basis.arrow_forwardManagement Discussion and Analysis is required in annual reports filed with the Securities and Exchange Commission. It includes management's analysis of current operations and its plans for the future. Typical items included in the MD&A are as follows: Management's analysis and explanations of any significant changes between the current and prior years' financial statements.Important accounting principles or policies that could affect interpretation of the financial statements, including the effect of changes in accounting principles or the adoption of new accounting principles.Management's assessment of the company's liquidity and the availability of capital to the company.Significant risk exposures that might affect the company.Any “off-balance-sheet” arrangements such as leases not included directly in the financial statements. Such arrangements are discussed in advanced accounting courses and textbooks.Using Google, enter Kroger Annual Report in the search field. Access the…arrow_forward
- What is the purpose of Regulation S–K?a. Defines generally accepted accounting principles in the United States.b. Establishes required disclosure of nonfinancial information with the SEC.c. Establishes required financial disclosures with the SEC.d. Indicates which companies must file with the SEC on an annual basis.arrow_forwardWhich of the following can be used to do an industry and company analysis?a. Business publicationsb. Description of the company’s business in the annual reportc. Management’s Discussion and Analysis section of the annual reportd. All of the listed optionsarrow_forward(Segment Reporting—Theory) The following article appeared in the Wall Street Journal.Washington—The Securities and Exchange Commission staff issued guidelines for companies grappling with the problem of dividing up their business into industry segments for their annual reports.An industry segment is defined by the Financial Accounting Standards Board as a part of an enterprise engaged in providing a product or service or a group of related products or services primarily to unaffiliated customers for a profit.Although conceding that the process is a “subjective task” that “to a considerable extent, depends on the judgment of management,” the SEC staff said companies should consider . . . various factors . . . to determine whether products and services should be grouped together or reported as segments.Instructions(a) What does financial reporting for segments of a business enterprise involve?(b) Identify the reasons for requiring financial data to be reported by segments.(c) Identify…arrow_forward
- Various types of accounting changes can affect the financial statements of a business enterprise differently. Assume that the following list describes changes that have a material effect on the financial statements for the current year of your business enterprise.Identify the type of change that is described in each item above and indicate whether the prior year’s financial statements should be recast when presented in comparative form with the current year’s financial statements. 1. A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction-type contracts. 2. A change in the estimated useful life of previously recorded fixed assets as a result of newly acquired information.…arrow_forwardMason Company has prepared consolidated financial statements for the current year and is now gathering information in connection with the following five operating segments it has identified. CompanyTotal Books Computers Maps Travel Finance Sales to outside parties $ 1,547 $ 121 $ 696 $ 416 $ 314 $ 0 Intersegment sales 421 24 240 39 118 0 Interest income—external 97 60 0 0 0 37 Interest income—intersegment loans 147 0 0 0 0 147 Assets 3,398 206 1,378 248 326 1,240 Operating expenses 1,460 115 818 304 190 33 Expenses—intersegment sales 198 70 51 31 46 0 Interest expense—external 107 0 0 0 0 107 Interest expense—intersegment loans 147 21 71 38 17 0 Income tax…arrow_forwardA. Select a publicly-traded company that is traded on U.S. exchange. Locate the annual report for at least the last three fiscal years. Analyze the financial statements for the company and review for large movements in specific accounts from one year to the next. In addition, review the notes to the financial statements as these are an integral part of the financial reporting package. Evaluate the balance sheet to determine if there are large changes in the company's assets, liabilities, or equity accounts. In addition, analyze the income statement and statement of cash flows.B. At a minimum, calculate the following ratios for two years, the debt-to-equity ratio, current ratio, quick ratio, return on equity, and net profit margin. For each ratio, explain what the ratio tells you about the company.arrow_forward
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