M2: Financial Accounting & Financial Statements Flashcards
Who uses financial statements?
Any individuals and/or organizations who are somehow invested in the performance of the company. There may be users both inside and outside the organization.
- Internal users
- External users
Who are internal users of financial statements? Why could they be interested in financial statements?
Internal users: includes management and other employees. They may use the financial statements to assess company performance or to aid in decision making. Employees can care because it can give information about job security and help you see what the companies goals are for the future. Sometimes employees get profit sharing which would also make them concerned about the financial statements. Management could care if their bonus relies on the performance of the company.
Who are external users of financial statements? Why could they be interested in financial statements?
External users: investors, banks, suppliers, government agencies or any public interest groups (Ex: environmentalists want to see if companies are acting sustainably). Anyone outside the organization who may use the financial statements to assess company performance or company policies.
Banks: want to make sure you’re going to be able to o pay back loans.
Supplier: want to make sure you can pay for all the supplies they’re sending.
Government: for tax returns.
What is a disclosure requirement?
Certain types of companies are required by law to produce financial statements and other types of information. In general, the information a company is required to prepare depends on if it is public or private.
What are the disclosure requirements for a public company?
Public companies: public companies are required by law to prepare and publish financial statements, as well as other information.
- Management Proxy Circular (produced annually)
- Annual Report.
- Management Discussion & Analysis (in US)/Annual Information Form (in Canada) .
- Quarterly Financial Statements (produced each quarter.
What are the disclosure requirements for a private company?
Private companies: while they are not legally required to do so, some private corporations may choose to prepare financial statements for information purposes or may be required to do as part of a loan agreement.
Why would private companies choose to make financial statements even if they’re not legally required to do so?
To get loans from banks (they check to see if you’re generating enough cash to pay back their loans before they give you one), so managers can see how the company is performing.
What is a management proxy circular? When is it produced? What is the purpose?
What is it: Contains information about the owners (major shareholders - who they are), management compensation/perks (benefits and salary of management ex. use of private jet), board of director compensation and responsibilities, and more.
When?: annually
Purpose: The purpose is to provide an agenda and proposals that will be voted on at the annual shareholder meeting. Items to be voted on can include financial statements, auditors, re-election of board of directors and management/board compensation.
What is an annual report?
Includes audited financial statements, letter from CEO/chairperson to provide review of accomplishments, progress, challenges ahead, areas of focus, summaries of key financial information, etc.
Which of the disclosure requirements is the most important or useful choice for investors and other external users?
- It depends on what investors are looking for
- Disclosure requirements all produced by management, but annual report has a higher level of reliance because it is the only one that is verified by a third party (financial statement needs to be audited).
What is Management Discussion & Analysis (in US)/Annual Information Form (in Canada)? When is it produced?
When?: annually
What is it: Contains information about business risks, bad debts (a client is not going to pay you for what they owe you), customer concentration (i.e. required to disclose is one customer makes up over 10% of sales - Risky because If that customer is not doing well they wont be able to pay you), long term goals of the corporation, performance in comparison to prior year goals, etc.
What are Quarterly Financial Statements? When are they produced?
Financial statements for a quarter of the year, as well as an update on any outstanding legal proceedings/disputes and updates on compliance with debt agreements. The goal is to provide users with an update on company performance so they don’t need to wait an entire year.
When?: quarterly
What are financial statements?
Financial statements are the primary way a company’s financial performance is communicated with owners (shareholders) and other users.
What would happen without financial statements (part of the annual report)?
Without financial statements and accounting frameworks, there would be no reliance on the performance of public companies, which would promote fraud & other unethical behaviour.
What is the typical financial reporting cycle of a public company with a year end on Dec 31?
- During the year, accountants record transactions (sale, make a purchase, etc.) using accounting software.
- Once Dec 31 hits: Accountants (controller) prepare financial statements. They take the data from the accounting system and they organize it to prepare financial statements.
- At the end of january/february: Financial statements are provided to auditors who perform the audit (is the financial statement accurate? Auditor = third party people who work at public accounting firms perform tests).
- March 31 (3 months after year end) financial statements are finalized and published.
What is the financial reporting cycle of a private company?
For a private company, there is no legal requirement to issue financial statements so the 3 month deadline does not apply and financial statements are often issued later in year (sometimes up to 6 months after the year end).