GAAP have been adopted in order to achieve a presentation of financial information that is understandable by users as well as relevant and

d reliable for decision making. Two authorites SEC and FASB (financial accounting standards board) SEC regulates US companies that issue securities to the public and requires issuance of a prospectus for any new security offering. Annual Reports (10-k) Quarterly Reports (10-Q). 8-K Reports ( IASB adoption of uniform international accounting standards. Financial Statements 1. Balance Sheet/Statement of financial position shows assets, liabilities and stockholders equity of the firm on a particular date, such as the end of a quarter or a year. 2. Income or earning statemtn results of operations revenues, expenses, net profit or loss, and net profit or loss per share per accounting period. 3. Statement of stockholders Equity Beginning and ending balances of all accounts that appear in the stockholders equity section of the balance sheet 4. Statement of Cash flows provides information about the cash inflows and outflows from operating, financing, and investing activities during an accounting period. Why Would an individual learn to read and interpret financial statements? Individuals cannot necessarily rely on auditors and management of firms to offer honest information about the financial well-being of firms. Which of the following organizations write accounting rules? FASB, SEC, and IASB What is the goal of the IASB? To have a worldwide acceptance of a set of international financial reporting standards. What are the basic financial statements provided in an annual report? Balance Sheet, income statement, statement of cash flows, and statement of stockholders equity. What items are included in the notes to the financial statements? Summary of accounting policies, changes in accounting policies if any, and detail about particular accounts. What does and unqualified auditors report indicate? Financial statements present fairly the financial position the result of operations and the changes in cash flows for the company.

Which of the following statements is false? 1.1 What types of questions can be answered by analyzing financial statements? Would an investment generate attractive returns? What is the degree of risk inherent in the investmenet? Should existing investment holdings be liquidated? Will cash flows be sufficient to service interest and principal payments to support the firms borrowing needs? Does the company provide a good opportunity for employment, future advancement, and employee benefits? How well does this company compete in its operating environment? Is this firm a good prospect as a customer? 1.7 What causes an auditors report to be qualified? Adverse? A disclaimer of opinion? Unqualified with explanatory language? Unqualified report states that the financial statements present fairly in all material aspects, te financial position, the results of operations and the cash flows for the accounting period in conformity with GAAP. Qualifiede front page of an audit done by a professional auditor. A qualified opinion suggests that the information provided was limited in scope and/or the company being audited has not maintained GAAP accounting principles Disclaimer of opinion means the auditor cannot evaluate the fairness of standards of the statement sand therefore experesses no opinion on them. Lack if independence by the auditor will also result in a disclaimer of opinion. Unqualified with explanatory language a consistency departure due to a change in accounting principle, uncertainty caused by future events such as contract disputes and lawsuits, or events that the auditor wishes to describe because they may present business risk and going-concern problems. Unqualified reports with explanatory language result in additional paragraphs to the standard report. 1.8 Why is the management discussion and analysis useful to the financial analyst? The management discussion and analysis is useful to the financial analyst because it contains information that cannot be found in the financial data. The content of this section includes coverage of any favorable or unfavorable trends and significant events or uncertainties in the areas of liquidity, capital resources, and results of operations. 1.9 What is a proxy statement, and why is it important to the analyst? The proxy statement is a document that the sec requires companies to solicit shareholder votes. The proxy statements contains voting procedures and information, background information about the company s nominated directors, director compensation, executive compensation, and any proposed changes in compensation plans, the audit committee report, and a breakdown of audit and

nonaudit fees paid to the auditing firm. This information is important in assessing who manges the firm and how management is paid and potential conflict of interest issues. The proxy statement is useful becauses it helps by providing information about the longevity and compensation of top management as well as corportate governance, audit related matters, director and executive compensation including option grants, and related party transactions. 1.12 Research FASB project to redesign the format of financial statements.

he purpose of this joint project is to establish a standard that will guide the organization and presentation of information in the financial statements. The results of this project will directly affect how the management of an entity communicates financial statement information to users of financial statements, such as present and potential equity investors, lenders, and other creditors. The boards goal is to improve the usefulness of the information provided in an entitys financial statements to help users make decisions in their capacity as capital providers. 1.Phase A would address the statements that constitute a complete set of financial statements and the periods for which they are required to be presented. [See above] 2.Phase B would address more fundamental issues relating to presentation and display of information in the financial statements, including aggregating and disaggregating information in each primary financial statement, defining totals and subtotals, and reconsidering the use of a direct or an indirect method of presenting operating cash flows. [In process] Phase C would address the presentation and display of interim financial information in U.S. generally accepted accounting principles (GAAP). The IASB also may reconsider the requirements in IAS 34, Interim Financial Reporting. [Not yet started]

1.14 Inel (a) We are the world's largest semiconductor chip maker, based on revenue. We develop advanced integrated digital technology products, primarily integrated circuits, for industries such as computing and communications.
(b) Core disiplines new products directions Unqualified with explanatory language change in account procedure

chapter 2. Balance Sheet shows the financial condition or financial position of a company on a particular date. Assets = Liabilities + Stockholders Equity. Common size balance sheet allows for comparision of firms with different levels of sales or total assets by introducing a common denominateor. Capital Expenditures TCC = Net working capital Current Assets includes cash or those assets expected to be converted into cash within one year or one operating cycle, whichever is longer. Operating Cycle time required to purchase or manufacture inventory, sell the product, and collect the cash. Net Working Capital = Current Assets Current Liabilities Cash and Marketable Securitues cash in any form cash awaiting deposit or in a bank account. Marketable securities are cash substitutes. Cash that is not need and invested in the short term for a return. Accounts Receivable Actual amount of the account allowance for doubtful accounts Allowance for doubtful accounts/ AR + allowance = 4.8% Current amount prior amount /prior amount Cost flow assumption is made in order to match the cost of products sold during an accounting period to the revenue generated from the sales and to assign a dollar value to the inventory remaining for sale at the end of the accounting period. FIFO, LIFO, AVERAGE COST FIFO period of rising prices, balance sheet inventory is valued at current cost, but COGS on the income statement is understated. LIFO reduces a companies tax bill during inflation because produces the largest cogs expense during inflation. Straight line (Depreciable base (cost salvage value)/ depreciation period = Dep expense Cost less accumulated depreciation x twice straight line rate = dep expense. Beginning Retained Earning +- Net income(loss) dividends = Ending RE 1. What does the balance sheet summarize for a business enterprise Financial position at a point in time 2. Assetts = Liabilities + Stockholders equity 3. (a) 4. b)

5. b 6. a 7. d 8. c 9. b 10. c 11. d 12. a 13. c 14. b 15. d 16. a 17. c 18. c 19. b 20. d 21. d 22. c 2.4 How can the allowance for doubtful accounts be used to assess earning quality? The allowance for doubtful accounts can be used to assess earning quality becayse a if a company expands sales by lowering credit standards, there should be a corresponding percentage increase in the allowance account. 2.7 Which inventory valuation method FIFO or LIFO will generally produce an ending inventory value oon the balance sheet that is closest to current cost? LIFO method most closely approximates the current cost of inventoryitems as they are the most recent purchases. 2.8 Discuss difference between straightline method of depreciation and the accelerated methods. Why do companies use didfferent depreciation methods for tax reporting. Straight line method Cost salvage value/depreciation period Cost accumulated depreciation x twice the straight line rate 2.11 Annual Revenue 800,000 350,000 200,000 dep 130,000 reporting 34% Reporting Purpoes = 108,800 Tax purposes = 85,000 Reporting net income = 341,200

Tax purposes = 165,000 Reporting = $211,200 Deferred tax liability 23,800 reconciles the temporary differences in expense and revenue recognition for any accounting period. 2.13 Allowance for doubtful accounts/AR + allowance 1186/116,735 + 1186 = 1.01% 3,311/111,903 + 3311 = 2.87z5 Cuurent amount prior amount/prior amount = 2.14 (a)FIFO 6000 + 11000 + 10,800 + 1,400 = 30,600 7200 + = 17,000 FIFO ending inventory = 17,000 LIFO = 7700 + 6000 =$13,700 Average Cost 30,600 / 3200 = 9.56 Average cost = 12,431.25 b) FIFO c) highest cost of goods sold LIFO 2.16 FIFO B) FIFO for high tech products lifo for food products . tech industry delationary food inflationary 2.23 Ch 3. Income statement statement of earnings, presents, revenues, expenses, net income, and earnings per share for an accounting period, generally a year or a quarter. Net Sales Total Sales revenues for each year of the three year period net of returns and allowances. Net Sales COGS = Gross Profit or gross margin Gross profit expresses as a percentage of net sales is the gross profit margin. Operating Profit (aka EBIT)

1. c 2. d 3. a 4. c 5. d 6. a 7. b 8. d 9. d 10. b 11. c 12. d 13. d 14. c 15. d 16. c 17. b 18. b 3.7 30% voting common stock paid 500,000 100,000 earning 40,0000 Investment income Income statement investment income = cost 12,000 30,000 Balance sheet investment account cost 500,000 equity 518,000 Balance sheet investment account cost and equity methos 3.8 Four items included in a companys comprehensive income Foreign Currency translation effects Unrealized gains and losses Additional pension liabilities Cash flow hedges 3.9 What can be found statement of stockholders equity details the transactions that affect the balance sheet equity accounts during an accounting period 3.11

Calculating profit measures Gross profit margin 50,000/236,000 = 21.19% 2009 = 23.08% 2008 = 29.17% Operating profit margin 2010 28,000/236000 = 11.86% 2009 27,000/195,000 = 13.85% 2008 24,000/120/000 = 20% Net profit margin 16,000/236000= 6.78% 2009 7.95% 2008 11.25% 3.12 3.15 3.18