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Module 2Changes to the Book updates

The questions

The Financial Statements

The SEC

Oversight of Financial Statements

When analyzing financial statements

How sure can we be?

The SEC

https://www.investopedia.com/terms/s/sec.asp

The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

As more and more first-time investors turn to the markets to help secure their futures, pay for homes, and send children to college, our investor protection mission is more compelling than ever.

As our nation's securities exchanges mature into global for-profit competitors, there is even greater need for sound market regulation.

And the common interest of all Americans in a growing economy that produces jobs, improves our standard of living, and protects the value of our savings means that all of the SEC's actions must be taken with an eye toward promoting the capital formation that is necessary to sustain economic growth.

The world of investing is fascinating and complex, and it can be very fruitful. But unlike the banking world, where deposits are guaranteed by the federal government, stocks, bonds and other securities can lose value. There are no guarantees. That's why investing is not a spectator sport. By far the best way for investors to protect the money they put into the securities markets is to do research and ask questions.

The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security. Only through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions.

The result of this information flow is a far more active, efficient, and transparent capital market that facilitates the capital formation so important to our nation's economy. To insure that this

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objective is always being met, the SEC continually works with all major market participants, including especially the investors in our securities markets, to listen to their concerns and to learn from their experience.

The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. Here the SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud.

Crucial to the SEC's effectiveness in each of these areas is its enforcement authority. Each year the SEC brings hundreds of civil enforcement actions against individuals and companies for violation of the securities laws. Typical infractions include insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them.https://www.sec.gov/Article/whatwedo.html

Other Countries Equivalents, but not necessarily of the same level of oversight (my plane ride)

England- Financial Services Authority

China- China Securities Regulation

Ghana – Securities Exchange Commission – Ghana

India – Securities Exchange Board –

Nicaragua

South Africa – Financial Sector Conduct Authority

Who is covered?

….the SEC enforces the statutory requirement that public companies and other regulated companies submit quarterly and annual reports, as well as other periodic reports. In addition to annual financial reports, company executives must provide a narrative account, called the "management discussion and analysis" (MD&A), that outlines the previous year of operations and explains how the company fared in that time period. MD&A will usually also touch on the upcoming year, outlining future goals and approaches to new projects. In an attempt to level the playing field for all investors, the SEC maintains an online database called EDGAR (the Electronic Data Gathering, Analysis, and Retrieval system) online from which investors can access this and other information filed with the agency. https://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commission

Not all offerings of securities must be registered with the Commission. Some exemptions from the registration requirement include:

private offerings to a limited number of persons or institutions; offerings of limited size; intrastate offerings; and securities of municipal, state, and federal governments.

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AuditsBy ALICIA TUOVILA Updated Jul 14, 2019

What Is an Auditor's Opinion?An auditor's opinion is a certification that accompanies financial statements. It is based on an audit of the procedures and records used to produce the statements and delivers an opinion as to whether material misstatements exist in the financial statements. An auditor's opinion may also be called an accountant's opinion.

Understanding Auditor's OpinionsAn auditor's opinion is presented in an auditor’s report. The audit report begins with an introductory section outlining the responsibility of management and the responsibility of the audit firm. The second section identifies the financial statements on which the auditor's opinion is given. A third section outlines the auditor’s opinion on the financial statements. Although it is not found in all audit reports, a fourth section may be presented as a further explanation regarding a qualified opinion or an adverse opinion.

For audits of companies in the United States, the opinion may be an unqualified opinion in accordance with generally accepted accounting principles (GAAP), a qualified opinion, or an adverse opinion. The audit is performed by an accountant who is independent of the company being audited.

KEY TAKEAWAYS

An auditor's opinion is made based on an audit of the procedures and records used to produce financial records or statements.

There are four different types of auditor's opinions. An auditor's opinion is presented in an auditor's report, which includes an

introductory section, a section that identifies financial statements in question, another section that outlines the auditor’s opinion on of those financial statements, and an optional fourth section that may augment information or provide additional relevant information.

Unqualified Opinion AuditAn unqualified opinion is also known as a clean opinion. The auditor reports an unqualified opinion if the financial statements are presumed to be free from material misstatements. In addition, an unqualified opinion is given over the internal controls of an entity if management has claimed responsibility for its establishment and maintenance, and the auditor has performed fieldwork to test its effectiveness.

Qualified AuditA qualified opinion is given when a company’s financial records have not followed GAAP in all financial transactions. Although the wording of qualified opinion is very similar to an unqualified opinion, the auditor provides an additional paragraph including deviations from GAAP in the financial statements and points out why the auditor report is not unqualified. A qualified opinion may be given due to either a limitation in the scope of the audit or an

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accounting method that did not follow GAAP. However, the deviation from GAAP is not pervasive and does not misstate the financial position of the company as a whole.

Adverse OpinionThe most unfavorable opinion a business may receive is an adverse opinion. An adverse opinion indicates financial records are not in accordance with GAAP and are grossly misstated. An adverse opinion may be an indicator of fraud, and public entities that receive an adverse opinion are forced to correct their financial statements and have the financial statements re-audited. Investors, lenders, and other financial institutions do not typically accept financial statements with adverse opinions as part of their debt covenants.

Disclaimer of OpinionIn the event that the auditor is unable to complete the audit report due to absence of financial records or insufficient cooperation from management, the auditor issues a disclaimer of opinion. This is an indication that no opinion over the financial statements was able to be determined. A disclaimer of opinion is not an opinion itself.

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Role of the auditor

Who must be audited?

Companies covered by SEC

Might be required by lending institutions

Types of Opinions

1. Unqualified Also called a clean opinion

2. Qualified3. Adverse4. Disclaimer

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Qualified-Departure from GAAP “except for…”-Scope Limitation

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Rules of Accounting Guided by Principals vs Rules

https://www.youtube.com/watch?v=7wMWcRpCqz8

PCOB, Public Company Accounting Reform and Investor Act of 2002Sarbanes Oxley, or simply SOX

Requires management report on internal controls and auditors evaluate it. Page 63 of Home Depot annual report.

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GAAP vs Non-GAAP

The Securities and Exchange Commission requires that any company that reports non-GAAP earnings also present the most directly comparable GAAP financial measure. For example, a company reporting EBITDA would also have to provide a step-by-step reconciliation with net earnings (the most comparable GAAP measure). https://finance.zacks.com/gaap-vs-nongaap-earnings-10887.html

GAAP and IFRS

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The Role of Footnotes

1. Allow additional information and clarification to items in the Income Statement, Balance Sheet and Cash Flow Statement

2. Present required disclosures, accounting methodologies and subsequent events.

3. May reveal issues with a company’s financial health

Think about Pensions, long-term debt, subsequent events

We will be assuming fair and complete disclosures in the financial statements

Continue with MFE Group

The journal entries that…well…..

Now to the Trial Balance

The last of Managerial ManagerialReview Videoshttps://www.youtube.com/watch?v=Zb9PKMf4jUs

https://www.youtube.com/watch?v=cIXkoLvtEjY

https://www.youtube.com/watch?v=3y6BzX9tZ2g

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Homework, Module 2

Review ProblemData on the three types of can openers Declan Company sells follows. Monthly fixed costs are $360,000.

Regular Deluxe Super

Selling Price $8.00 $12.00 $20.00Variable Costs 4.80 6.00 8.00Contribution Margin 3.20 6.00 12.00

Consider each of the following questions independently

1. Suppose the sales mix in dollars is, Regular, 60%, Deluxe 30%, Super, 10%.a. Determine the weighted-average contribution margin percentage and the monthly

sales to break even.b. Determine how many units of each model are sold at the break-even point.c. Prepare an income statement by product for sales of $1,000,000. Assume that, of

the $360,000 fixed costs, avoidable fixed costs for each model are $40,000 ad direct unavoidable fixed costs are $20,000, $28,000, and $12,000 for the Regular, Deluxe and Super models respectively.

Questions 1-19 , except 18.