ACCT 800

Financial Reporting &

Analysis

Fall 2018
Prof. Jing He
[email protected]
 MODULE 1

FINANCIAL ACCOUNTING FOR

MBAS
[EHMHM CH.1]

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 What is ACCOUNTING?
• The “language of business”
“You have to understand accounting and you have to understand the
nuances of accounting. It is the language of business and it’s an
imperfect language, but unless you are willing to put in the effort to learn
accounting – how to read and interpret financial statements – you really
shouldn’t select stocks yourself.” - Warren Buffett
• The process of identifying, recording, summarizing, and
reporting economic information to decision makers
• Financial vs. managerial accounting
– We focus on financial accounting now and will learn managerial
accounting later in the semester
• Public vs. private firms 3
 January 31, 2012. By Paul Sloan.
Founder Mark Zuckerberg can't hold off going
public any longer--and that should be great for the
company.

It's no secret that Zuckerberg has tried to keep Facebook private as long as possible, believing--rightly or
wrongly--that that's the best way to stay nimble and build the business. But at this point, Zuck's got little
choice. Facebook has become too big, it has too many shareholders, and so it's on track to go public this
spring, eight years after Zuckerberg started Facebook in his Harvard dorm room.
A couple of months ago, the 27-year-old Zuckerberg assembled his top management team to talk about the
IPO game plan, according to a person familiar with the situation. And now there's reportedly a heated
competition on Wall Street between banks eager to take the lead role arranging the sale of what will likely be
the biggest tech IPO in history. The company could file its S-1 this week.

The key reason Facebook is going public is because of an antiquated Securities and Exchange Commission
rule from 1964 that says that any private company with more than 500 "shareholders of record" must adhere
to the same financial disclosure requirements that public companies do. That means filing detailed
quarterly and yearly financial reports, and dealing with all the scrutiny that comes with a powerful
company opening its books.
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 Dell’s Key
Moments
Our company history is full of interesting developments. And we couldn't help but
pick out a few of our favorite milestones to share:
• 1984 — At the age of 19, Michael Dell found PC's Limited with $1,000 and a
game-changing vision for the technology industry.
• 1988 — We complete our initial public offering, raising $30 million and increasing
market capitalization from $1,000 to $85 million.
• 1992 — Dell debuts on the Fortune 500, making Michael Dell the youngest CEO
on the list.
……
• 2005 — Dell tops the list of "America's Most Admired Companies" in Fortune
magazine.
• 2010 — Dell is ranked the No. 1 healthcare information technology services
provider in the world according to Gartner, Inc.
• 2013 — Michael Dell and private equity firm Silver Lake Partners buy back Dell
from public shareholders to accelerate our solutions strategy and to focus on the 5
innovations and long-term investments with the most customer value.
 Dell is now a Private Company !

On Oct. 29, 2013, Dell announced the completion of its acquisition by Michael Dell,
Dell's founder and CEO, and Silver Lake Partners, a leading global technology firm.

Why Dell is Better as a Private Company

From eWEEK.com. By Sean Michael Kerner. Posted on June, 26, 2015.

The impact of Dell's now being a private company also adds to the company's ability to perform, according to
Jim Ganthier. As a private company, Ganthier said that Dell is faster and more focused than it could have
been as a public company.
"When you have a very short-term focus and you're thinking on a 90-day shot clock, there are certain decisions
you're going to make because you have someone else looking over your shoulder," Ganthier said. "When you're
private, you can focus on customers, you can focus on the long term and you can focus on strategic aspects.“
Ganthier added that there is also a significant time-management benefit to being private. He commented that as
a private company, the CEO and top executives don't have to take the 15 to 20 days a year needed to get
prepped for Wall Street. Instead, that time can be used to focus on strategy and execution.
"It not only frees you up, it [being private] makes you fast; it makes you more agile; and frankly, that's one of
the reasons why you're seeing us put such great numbers up on the wall," Ganthier said.
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 Dell Technologies, The Largest Private Tech Company, Opens Its Books
From www.seekingalpha.com, Apr. 28. 2017.
… Dell Technologies, which rightly claims to be the world's largest privately-held technology
company. The company was formed by the acquisition last September of EMC, a leading enterprise
storage company, by Dell, Inc., a leading PC and server company. And Dell, in turn, was itself was
taken private in 2013 in a leveraged buyout by Michael Dell, MSD Partners and Silver Lake Partners.
With these transactions, two major tech players may well have passed from the public view afforded
through SEC filings, earnings calls and analyst meetings. Yet circumstances arising out of the
acquisition require the merged entity to file quarterly and annual results with the SEC, even as a
private company. Not only has it issued a significant amount of publicly-traded debt, it is associated
with two tracking stocks.
In recent weeks, Dell Technologies has reported its fourth quarter and full-year results, filed its first
10-K, and held both its year-end earnings conference call and its first analyst meeting as a merged
company. Through these events, and the fiscal third quarter earnings report and conference call, the
company has shared a significant amount of information about its structure and finances

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Demand: Who Uses Accounting Information?
• Managers
• Analysts and information intermediaries
• Creditors
• Stockholders
• Board of directors
• Suppliers
• Customers
• Employees
• Regulators & tax agencies

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 Supply:
ACCOUNTING= INFORMATION SYSTEM

Analyze,
Economic Measure, Financial Decisions
Events and Statements
Record

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 Financial Reporting Requirements
• The Securities and Exchange Commission (SEC) requires public
firms to file financial statements four times a year – three
quarterly reports (10-Qs)and one annual report (10-K)

• Form 10-K: audited annual report that includes the four financial
statements, with explanatory notes and managers’ discussion and
analysis (MD&A) of financial results

• Form 10-Q: unaudited quarterly report that includes summary

version of four financial statements and limited additional
disclosures 10
Form 10-K and 10-Q

• http://investor.fb.com/

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 Supply of Information
• Benefits of more disclosure
 Lower cost of debt and equity capital (as reflected in lower interest
rate and higher stock price)
 Improve recruiting efforts in labor market
 Establish superior supplier-customer relations
 May reduce litigation risk

• Costs of more disclosure

 Cost to prepare and disseminate information
 Proprietary costs
 Increase political cost
 Reputation costs
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 Political Costs of
Disclosure
May 27, 2010. Huffington Post: BP's Profits Far Outweigh The Cost Of Cleaning Up
Gulf Oil Spill

While the Gulf oil spill has devastated the region, and will have long-term consequences, BP will be able to shake off the costs of
the cleanup with little more than a shrug.
The company's stock price has taken a hit, and its reputation is in tatters, but the company makes so much money that it is
unlikely to suffer much in the long run.
The cost per day of the oil spill to BP so far has been $16 million. That number is dwarfed by the $66 million per day the
firm made in profit in the first quarter of this year. Indeed, in 2009 BP's total profits were $14 billion. As CNN's Christine Romans
notes, even if the cleanup costs were to rise to $14 billion, it would simply mean that BP went one year without make a profit, let
alone losing money.
It's difficult to see what incentives there are for BP to operate in a safer and more environmentally conscious manner when the
consequences for causing even such a catastrophic crisis as this one are so negligent.

May 27, 2010. CNN: BP’s bottom line not hurt by oil spill
BP has not faced much financial problems due to Gulf Coast oil spill clean up efforts.

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 Litigation Costs of not
Disclosing
Washington, D.C., July 22, 2010 — The Securities and Exchange Commission today charged Dell
Inc. with failing to disclose material information to investors and using fraudulent accounting
to make it falsely appear that the company was consistently meeting Wall Street earnings
targets and reducing its operating expenses.
The SEC alleges that Dell did not disclose to investors large exclusivity payments the company
received from Intel Corporation to not use central processing units (CPUs) manufactured by Intel’s
main rival. It was these payments rather than the company’s management and operations that
allowed Dell to meet its earnings targets. After Intel cut these payments, Dell again misled
investors by not disclosing the true reason behind the company’s decreased profitability.

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 Publicly Available Information Sources

• Annual reports, quarterly reports, and other regulatory

filings
http://www.sec.gov/
• Company press releases
• Conference calls
• Business press
• Analyst reports

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 Raymond James Analyst
Conference Calls

First quarter 2018

The Raymond James quarterly analyst conference call took place on Thursday, January
25th. Earnings were released on January 24.
The subjects covered may include forward-looking information; furthermore, the
company may disclose additional material information in response to queries from
analysts on the call.

Fourth quarter 2017

The Raymond James quarterly analyst conference call took place on Thursday, October
26. Earnings were released on October 25.

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 Canada Goose tumbles
despite topping earnings
estimates

From Business Insider, Feb 8, 2018.

• Canada Goose’s stock fell on Thursday by 15.25% per share at $32.50, after failing
to excite investors with its better-than-expected earnings results. This was the
largest drop since it went public last March.
• The high-end coat maker reported quarterly results that beat Wall Street estimates.
• Yet the company did not give new annual guidance and it named a new CFO,
causing Wall Street investors to tread with caution, according to RBC.
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 Accounting Rules
• Generally Accepted Accounting Principles (GAAP) are the
rules that govern how accountants in public traded US firms
measure and communicate financial information
– The Financial Accounting Standards Board (FASB), SEC, and
AICPA (American Institute of Certified Public Accountants) set
the rules
– Intend to converge with International Financial Reporting
Standards (IFRS) developed by the International Accounting
Standards Board (IASB)
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 Primary Financial Statements
Report a company’s
• Balance Sheet financial position at a
point in time
• Income Statement
Report a company’s
• Statement of Cash Flows performance over a period
of time
• Statement of Stockholder’s
Equity

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 Balance Sheet

• Balance sheet reports a company’s financial

position at a point in time

• It reports a company’s resources (namely

assets) and the sources of financing (the
claims against the resources).

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 Balance Sheet - Accounting Equations
Investing = No owner + Owner
Financing Financing

Assets = Liabilities + Equity

Economic
Resources of the The residual
obligations of the
company (e.g., claims against the
company to
cash, company's assets
outsiders (e.g.,
equipment, (after deducting
bank loan, bond,
buildings, etc.) liabilities)
etc.)

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 In other words

A = L + SE

WHAT YOU = WHAT YOU + YOUR

OWN OWE EQUITY

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Berkshire Hathaway’s Balance Sheet

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 Income Statement
• Income statement reports on a company’s
performance over a period of time
• Revenues – Expenses = Net Income
• For manufacturing firms
Revenue
- Cost of goods sold
= Gross profit
- Total expenses
Net income
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Berkshire Hathaway’s Income Statement

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 Statement of Equity
• The statement of equity reports on changes in the accounts
that make up equity
– Contributed capital
– Earned capital (Retained earnings)
– Other equity (typically accumulated other comprehensive
income, and noncontrolling interest – will briefly discuss in
Module 8)

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 Berkshire Hathaway’s
Statement of Stockholders’ Equity

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 Statement of Cash Flows

• The statement of cash flows reports the change

(either an increase or decrease) in a company’s cash
balance over a period of time
• It reports cash inflows and outflows from operating,
investing, and financing activities

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 Berkshire Hathaway’s
Statement of Cash Flows

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 Financial Statement Linkages

• The income statement and the balance sheet are

linked via retained earnings.
• Retained earnings, contributed capital, and other
equity balances appear both on the statement of
stockholders’ equity and the balance sheet.
• The statement of cash flows is linked to the
income statement as net income is a component
of operating cash flow.
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 Information Beyond Financial
Statements
• Management Discussion and Analysis
(MD&A)
• Financial Statement Footnotes
• Independent Auditor Report
• Other Regulatory Filings and Proxy
Statements

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 Audit Report
• Assertions in a typical “CLEAN” audit report:
– Financial statements are management’s responsibility. Auditor
responsibility is to express an opinion on those statements.
– Auditing involves a sampling of transactions, not investigation
of each transaction.
– Audit opinion provides reasonable assurance that the
statements are free of material misstatements, not a
guarantee.
– Auditors review accounting policies used by management and
the estimates used in preparing the statements.
– Financial statements present fairly, in all material respects a
company’s financial condition, in conformity with GAAP. 32
33
 Ethics Considerations

• Accounting is not an exact science

• Ethical standards in accounting are designed to produce
accurate information for decision making
• Earnings management – misrepresent financial
information to mislead financial statement users, most
often to manipulate earnings towards a pre-determined
target

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SEC Charges Trinity Capital
Corporation and Former Bank
Executives With Accounting
Fraud
Washington D.C., Sept. 28, 2015 — The Securities and Exchange Commission
today announced that Trinity Capital Corporation and its wholly-owned
subsidiary, Los Alamos National Bank, have agreed to pay $1.5 million to
settle accounting fraud charges.
A SEC investigation found that Trinity materially misstated its provision
for loan losses and its allowance for loan and lease losses in its
quarterly and annual filings with the Commission during 2010, 2011, and
the first two quarters of 2012.  Specifically, Trinity understated its
reported 2011 net loss available to common shareholders by $30.5 million,
reporting income of $4.9 million instead of a $25.6 million loss.
Five current or former executives also are charged in the case that involves
fraudulent manipulation of the company’s financial results and failure to
implement sufficient internal accounting controls over loan accounting. 35
SEC Charges Former Tech
Execs with Accounting
Fraud
San Jose (October 6, 2015) By Michael Cohn
The Securities and Exchange Commission has charged two former
top executives at OCZ Technology Group Inc. for accounting failures
at the now-bankrupt seller of computer memory storage and power
supply devices.
In a complaint filed in the Northern District of California, the SEC
alleges that OCZ’s former CEO Ryan Petersen engaged in a
scheme to materially inflate OCZ’s revenues and gross
margins from 2010 to 2012. It separately charged OCZ’s former
chief financial officer Arthur Knapp for certain accounting,
disclosure, and internal accounting controls failures at OCZ. Knapp 36
 Financial Statement Analysis

Q: Company ABC reports a profit for $10 million. Does this

company perform well in terms of profitability?
- We need to know the size of investment
 Return on assets (ROA)= Net Income / Average
Assets
 Average Assets=(beginning-year assets + ending-year
assets)/2
- What if the company has $500 million in assets?
- What if the company has $100 million in assets?
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 Financial Statement Analysis

Profit Asset
Margin Turnover
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 Return on Equity

 ROE = Net Income / Average Equity

 Average Equity=(beginning-year equity + ending-
year equity)/2

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END OF MODULE 1! 

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