This document provides an overview of financial statements and related topics. It outlines a 5-day schedule to cover introductions, the income statement, balance sheet, cash flows, and advanced topics. It defines terms like audited and GAAP. It describes the Sarbanes-Oxley Act's emphasis on internal controls and disclosure for public companies. Key SEC filings like 10-Ks and 10-Qs are also outlined. The goals of accounting and finance are defined, and GAAP, the operating cycle, and cash flows are explained at a high level.

1. Unlocking
Financial Statements
Day 1

2. Schedule for Week
 Day 1: Introduction to financial
statements
 Day 2: Income statement
 Day 3: Balance sheet
 Day 4: Cash flows
 Day 5: Beyond the basics
Understanding Financial Statements
2

3. Introduction
To Financial Statements
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3

4. Types of Companies
 Public
 Private
 Financial statements conforming to public
company statements
 Non-profits
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4

5. Important Terms
 Unaudited
 Audited
 Accountants
 Certified Public Accountants (CPAs)
 GAAP, FASB, AICPA, PCAOB
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6. Sarbanes-Oxley Act of 2002
 Response to abuses with Enron and
WorldCom as catalysts
 New responsibilities and resources for
SEC
 Created PCAOB
 Major emphasis on “internal controls”
 More disclosure for public companies
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7. Sarbanes-Oxley Act
 Analysts must disclose potential conflicts of
interest
 Limited types of services accounting firms
can provide to public company clients
 CEO, CFO attest to accuracy, completeness,
fairness of financial statements
 Rigorous penalties for fraud, other misdeeds
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8. Public Company Accounting
Oversight Board
 Created by SOX to oversee accounting
 SEC appoints members to five-year terms
 Five full-time members including a chairman
 Two must be or have been CPAs
 All members must be “financially literate”
 Began operating May 2003
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9. Key SEC Documents
 10-K
 10-Q
 8-K
 Proxy statement
 Prospectus
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10. Annual Report (or 10-K)
Strategy
 Auditor’s report
 Management’s
discussion and
analysis
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11. Annual Report (or 10-K)
Strategy (cont.)
 Financial statements
and footnotes
 Management’s letter
if annual report
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12. Basic Auditor’s Report
 Independent auditor’s opinion on whether
financial statements are presented fairly in all
material respects, in accordance with GAAP:
 We looked at these statements
 They’re management’s responsibility; we’re
just here to express our opinion
 We followed the rules in our audits and here’s
what an audit involves
 In our opinion, the statements fairly present
the company’s position
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13. Understanding Financial Statements
13

14. Auditor’s Report by Category
 Clean or Unqualified
 Qualified
 Disclaimer
 Adverse
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15. New Auditor’s Report
 Combines traditional report with internal
controls requirement of Sarbanes-Oxley
Act
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16. MD&A
 Must read it
 Often a source of good information and
insights
 Densely written
 SEC says it wants greater transparency
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17. Goal of Accounting
 Record, classify and report financial
transactions. To provide managers across the
organization with information that facilitates:
 Control of activities and expenditure
 Refinement of operational plans
 Accountability
 Reporting on project outcomes
 Writing of bids for new funds
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18. Goal of Finance
 Maximize shareholder wealth as
reflected in market price of the stock
 Achieving this goal requires financial
manager to focus on economic profit,
not accounting profit
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19. Financial Decisions
 Long-term investment decisions
 Capital budgeting
 Long-term financing decisions
 Capital structure
 Working capital management decisions
 Net working capital
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20. Financial Decisions
 Investing decisions: Types of assets
firm wants to hold.
 Financing decisions: Acquisition of
funds needed to support long-term
investments.
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21. Generally Accepted
Accounting Principles
 Guidelines based on theory and
practice
 Evolved over time
 Procedures, concepts and standards
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22. GAAP: Key Points
 Periodicity
 Going concern
 Economic entity
 Monetary unit
 Full disclosure
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23. GAAP: Key Points
 Historical cost
 Revenue realization
 Consistency
 Materiality
 Industry practices
 Conservatism
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24. Cash or Operating Cycle
 Cash
 Purchase inventory
 Produce product
 Sell product
 Cash
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25. Cash or Operating Cycle
(cont.)
 “Cash”
 Cash
 Receivables
 Debt
 Inventory
 Raw materials
 Work in progress
 Finished goods
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26. Cash or Operating Cycle
(cont.)
 Sell product
 Accounts receivable
 Cash
 Cash
 Collect receivables as cash
 Pay off payables
 Start over
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27. Presented by:
 James K. Gentry, Ph.D.
 Clyde M. Reed Teaching Professor
 School of Journalism and Mass Communications
 University of Kansas
 jgentry@ku.edu
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