5 Flashcards
(30 cards)
managers
use it to run business. based on sales and expense info
directors
board of directed elected by the companys shareholders to serve as their representatives. oversee tha managers of the company , ensuring tha management and dinancial decisions aim to benefit shareholders
look at financial statements to evaluate whether the CEO,CFO incest in assets and have managed to generate suddicient sales and net income drom those assets
creditors
for exmaple suppliers use it to decxide whether to enter into contracts to supply other companies - see if they have enough assets for liabilities
bankers use it to to evaluate a companys activities by measurin the companys ability to satisfy certain financial targets- can they repay loans
loan covenants
terms od a loan afreement that, if broken, wntitles the lender to renegotiate loan terms or to force repayment
inverstors
look to help assess the financial strength of a businessand estimate its value
forcasts the companys future revenues, expenses, net income
government
Canadian securities administrators (CSA). closely monitos the info that is reported in financial statemtns to ensure that the financial statements present fair results and that no improper or fraudulant practices were used
the canada revenue agency (CRA) also is interested in financial statements because the income statement provides s atarting point for determinating the amount of taxes that should be paid by private and public corporations th
the key organizationa that play an important role in developing financial reporting
- Cnadian Accounting standards board: sets GAAP, produces the CPA Canada Handbook
- International accounting standards Board AKA iNTERNATION Financial Reporting Standards- MAKES UNIfied standards and haronize regulation
- Provincial and Territorial securities commission: ovserve and monitor the capital market place to ensuer that it is fair - make sure they are following security legislations - they have to make GAAP fianncial statements
Fraud
3 things
3 things: there must be an incentive for someone to commit the fraud
- an opportunity must exist to commit the fraud
- the person committing the fraud must be able to rationlize and conceal the fraud
known as the fraud triangle`
2 incentives to commit fraud
- creating business opportuniy; managers want to produce pleasing financial statemnts because:
a. satisfy loan convenants to not have to pay higher interst rates, repay the loan or
b. increase equity financing
c. attract business partners: - make the business appear more stable than it acutally is- mislead suppliers or other companies - Stisfying personal greed- managers can benifit in 3 ways
a. enhance job security
b. increase personal wealth: by having shares that are worth more
c. obtain a bigger paycheck: cash bonuses
rationalized and conceals fraud
for personal entitlement, , egotisticle, lie or pressure others to look the other way
what changes were made to canadian financial reporting environ to reduce fraud counteract incentives for committing fraud
- counteract incentives for committing fraud : 5million $ fine and 20 years in prison
- Reduce opportunities for fraud: these rules aim to achieve this
a. managers must review how well their compnays internal control worked during the tear and issue a report that indicates whether the controls over financial reporting operated eddectively - gives them acounting responsability
b. The compnays board of directors is required to establish an audit committee of independant directors to oversee financial matters of the company
c. The external auditors of large public companies must test the effectiveness of the companys internal control and issue a report that ives an opinion about the companies internal control over financial reporting - Encourage Honesty in Employee :example have tip lines, protect whistle blowers
3 enhancements made to the financial statement users
comparative financial statements, multiple step income statements and the statement of shareholders equity
comparative financial statements
report numbers for 2 or more time periode next to each other.
for example dec 31 2016 vs. 2017
BS typically has 2 collums while IS has 3
Multiple Step Income statement
income statement differes slightly than first few chapters - which used the single step income statement . The new version by displaying subtototals that indicare multiple steps before reaching net income at the bottom - this displays important measures of profit in addition to net income:
- Income from operations - a new row underneath expenses- inteneded for investors intersted in long term success - care most about the ability to to generate income from its core business activities like developing , making and selling. peripheral activities like earning revcenue from incestments arent as important in the long run because not the compnies goal
the top portion of IS reports only core activities (core revenues and expenses ) it then has the income from operations such as investment because this is not a core
Income (LOSS) before income tax expenses: this other new subtottal iindicated how much profit the companyt would have reported hadf there been no income taxes - this is usefull because not all comapny pay the same rate of tax
Statement of Shareholders Equity
a variation of the statement of retained earning to show each sections (re, cc, d)
its has a collum for each shareholders ewuity account and shows the factors tha increase and decresed these account balances suring the period
independant external audit
examine financial statements to detect material misstatements
after acompetint the udit , external auditors will attach a report to the financial statements that gives a pass/fail type of opinion.
material misstatements
large enough to influence the decisions of financial statement users
unqualified audit opinion
indicated that the financial statements are presented in accordance with GAAP
qualified audit opinion
if the FSs fail to follow GAAP or if the auditor were not able to complete the tests needed to determine GAAP
preliminary released
press release about 5 weeks after end of period
financial statemt release
the annual reprt is organized into 2 main sections
- friendly letter to investors from the companies CEO and glossy picture of products
- financial section
quarterly report: supercondensed version - missing some stuff
Canadian Securities Adminstrator CSA
all canadian public companies are required to publish certain reports , including annual report
avaialbel to public when SEDAR receives them
2 commonly used benchmarks to compare companies
- prior periodes :comparing a comapny over time we can gain a sense of how the companies performance is changin over time - this is refered to as the time series comparaison!!!!
- Competitors: compare competitors with with a particular industry - known as cross-sectional analysis
a BASIC BUSINESS Model
a 1. obtain financing
- invest in assets
- generate revenues
- produce net income
