英文台湾中兴大学金融系王之彦老师的财务报表分析chap002

1、2CHAPTERFinancial Reporting and AnalysisMcGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.Financial Reporting EnvironmentRegulatorsFASBAICPAIndustry PracticesGAAPEnforcement and Monitoring MechanismsSECCorporate GovernanceManagersAuditorsStatutory Financial Reports(Financia

2、l Statements)Alternative Information SourcesEconomy and Industry InformationVoluntary Disclosure UsersAnalystsInvestors and CreditorsOther UsersLitigationForm 10-K (Annual Report)10-Q(Quarterly Report)OtherSEC Filings14-A(Proxy Statement/ Prospectus)Statutory Financial Reports8-K(Current Report)20-F

3、 (Registration Statement/Annual Report Foreign)Earnings Announcements Key summary measures (pre-audit) Often one to six week lag Informative to market Lacks supporting financial detailsEnvironmental FactorsGAAPGenerally Accepted Accounting PrinciplesLevel I(Most authoritative) Level IILevel IIILevel

4、 IV(Least authoritative) FASBStandards andInterpretationsAPBOpinionsAICPA(CAP)Accounting Research BulletinsFASBTechnical BulletinsAICPAIndustry Audit & Accounting GuidelinesAICPAStatement of PositionAICPAPractice BulletinsFASBEmerging Issues Task ForceFASBImplementation GuidesAICPAInterpretation

5、sRecognized and Widely Used Industry PracticesEnvironmental FactorsFinancial Accounting Standards BoardGenerally Accepted Accounting PrinciplesProvide input to Help set Securities and Exchange CommissionUnions InvestorsAccountantsPoliticians Lenders OthersAICPAEnvironmental FactorsSecurities and Exc

6、hange Commission (SEC) Independent, quasi-judicial government agency Administer securities regulations & disclosures Can modify & set GAAP, if necessary Rarely directly challenges FASB Major player in global accountingEnvironmental FactorsInternational Accounting Standards (IAS) Set by Inter

7、national Accounting Standards Board Not currently accepted in U.S. SEC under pressure to accept IASEnvironmental FactorsManagers of Companies Set by International Accounting Standards Board Not currently accepted in U.S. SEC under pressure to accept IAS Main responsibility for fair & accurate re

8、ports Applies accounting to reflect business activities Managerial discretion is necessary in accounting Major lobbyist on GAAPEnvironmental FactorsAuditing Set by International Accounting Standards Board Not currently accepted in U.S. SEC under pressure to accept IAS SEC requires Audit Report Audit

9、 opinion can be: - clean (fairly presented)- qualified (except for)- disclaimer (no opinion) Check Auditor quality & independence AuditorsEnvironmental FactorsCorporate Governance Set by International Accounting Standards Board Not currently accepted in U.S. SEC under pressure to accept IAS Boar

10、d of directors oversight Audit committee of the board - oversee accounting process- oversee internal control- oversea internal/external audit Internal AuditorEnvironmental FactorsInternal UsersExternal UsersManagersOfficersInternal AuditorsSales ManagersBudget OfficersControllerLendersShareholdersGo

11、vernmentsLabor UnionsExternal AuditorsCustomersEnvironmental FactorsCreditorsEquity Investors Active & Speculative Investors rely on financial reports Solvency & Liquidity analysis relies on financial reportsEnvironmental FactorsVoluntary DisclosureEconomic, Industry & Company News Impac

12、ts current & future financial condition and performanceInformation Intermediaries Industry devoted to collecting, processing, interpreting & disseminating company information Includes analysts, advisers, debt raters, buy- and sell-side analysts, and forecasters Major determinant of GAAP Many

13、 factors encourage voluntary disclosure by managersFinancial AccountingStewardship Safeguard assets Increase equity value Protect creditorsAccountability & Performance MeasurementInformation Perspective Amount of Timing prospective Uncertainty net cash inflowsPredictability & Decision Useful

14、nessObjectivesHistorical Emphasis(but still important)Modern EmphasisFinancial AccountingHierarchy of Accounting QualitiesConstraintsU s e r - s p e c i f i c qualitiesPrimary qualitiesIngredients of primary qualitiesUnderstandabilityRelevanceReliabilityFeedback valuePredictive valueComparability an

15、d consistencyNeutralityVerifiabilitySecondary qualitiesBenefits CostsMaterialityUsers of accounting informationDecision makers and their characteristicsDecision usefulnessRepresentational faithfulnessTimelinessFinancial Accounting Double EntryDouble Entry - duality from accounting equation, A=L+E Hi

16、storical CostHistorical Cost - fair & objective values from arms-length transactions Accrual AccountingAccrual Accounting - recognize revenues when earned, expenses when incurred Full DisclosureFull Disclosure - measure and/or disclose material events and transactions MaterialityMateriality - th

17、reshold when information impacts decision making ConservatismConservatism - reporting or disclosing the least optimistic information about uncertain events and transactionsImportant Accounting PrinciplesFASBFinancial AccountingRelevance of Accounting Numbers0%20%40%60%80%100%65707580859095YearPercen

18、t of Stock Price ExplainedBook ValueEarningsCombinedRelation between Accounting Numbers and Stock Prices Financial Accounting Timeliness - periodic disclosure, not real-time basis Frequency - quarterly and annually Forward Looking - limited prospective informationLimitations of Accounting NumbersAcc

19、ruals-The CornerstoneNetIncome=AccrualsOperatingCashFlow+Revenue Recognition recognize revenues when(1) Earned(2) Realized or RealizableExpense Matching match with corresponding revenues -Product costs -Period costs Accruals-The CornerstoneFoundations of Accrual AccountingOperating cash flow (OCF) -

20、/+Cash investment & divestment in operating assets =Free cash flow (FCF) +/-Financing cash flows (including investment & divestment in financing assets) =Net cash flow (NCF)Accruals-The CornerstoneRelation between Cash Flows and AccrualsShort-Term Accruals: Yield current assets and currentli

21、abilities (also called working capital accruals)Long-Term Accruals: Yield non-current assets and non-current liabilities (arise mainly from capitalization) Accruals-The CornerstoneShort-Term and Long-Term AccrualsNote: Analysis research suggests short-term accruals are more useful in company valuati

22、onAccruals-The CornerstoneRelevance of Cash Flows and Income over a Companys Life Cycle+IncomeInvesting cash flowFree cash flowFinancing cash flowOperating cash flowDeclineGrowthMaturityInceptionAccruals-The CornerstoneComparison of Stock Price, Net Income, and Free Cash FlowsWal-Mart Stock priceNet

23、 incomeFree cash flowKmart Stock priceNet income4.22 5.33 8.25 13.47 16.28 13.25 11.44 10.19 11.87 19.91 Fiscal year19891990199119921993199419951996199719980.18 0.24 0.28 0.35 0.44 0.51 0.58 0.60 0.67 0.780.04 (0.01) (0.05) (0.17)(0.48) (0.50) (0.19) (0.21) 0.84 0.60 18.9416.6215.5024.5023.25 19.63

24、13.635.8811.13 11.00 1.76 (2.26) 0.20(0.47)(2.15)1.292.710.480.611.35 Free cash flow 2.000.811.892.022.07 (2.13) 0.64 (1.24) (0.45)0.51 Accruals-The CornerstoneRelation between Stock Prices and Various Income and Cash Flow Measures for a Large Sample of CompaniesNIBX = Net Income before Extraordinar

25、y Items and Discontinued Operations; NI = Net Income; OCF = Operating Cash Flow; FCF = Free Cash Flows; NCF = Net Cash Flow (Change in Cash).57.6244.3633.0232.621.000.0010.0020.0030.0040.0050.0060.0070.00NIBXNIOCFFCFNCFPercent of Price ExplainedAccruals-The CornerstoneRelation between Stock Returns

26、and both Income and Operating Cash Flows for Different Horizons of a Large Sample of CompaniesSource: Dechow, P0 .1 03 .1 81 0 .8 83 .2 41 6 .2 04 0 .2 60 .0 05 .0 01 0 .0 01 5 .0 02 0 .0 02 5 .0 03 0 .0 03 5 .0 04 0 .0 04 5 .0 0Q u a r te rA n n u a lF o u r - Y e a rT i m e H o r i z o nPercent of

27、 Stock Returns ExplainedO C FN I. Accruals-The CornerstoneAccruals and Cash Flows - Myths. Myth: Since company value depends on future cash flows, only current cash flows are relevant for valuation. Myth: Company value equals discounted future cash flows. Myth: All cash flows are value relevant. Myt

28、h: All accruals accounting adjustments are value irrelevant. Myth: Cash flows cannot be manipulated. Myth: All income is manipulated. Myth: It is impossible to consistently manage income upwards in long run. Myth: Accounting rules are irrelevant for valuation.Accruals-The CornerstoneAccruals and Cas

29、h Flows - Truths. Truth: Accrual accounting (income) is more relevant than cash flow. Truth: Cash flows are more reliable than accruals. Truth: Accrual accounting numbers are subject to accounting distortions. Truth: Company value can be determined by using accrual accounting numbers. Accounting Ana

30、lysisDemand for Accounting Analysis Adjust for accounting distortions so financial reports better reflect economic reality Adjust general-purpose financial statements to meet specific analysis objectives of a particular userAccounting AnalysisSources of Accounting Distortions Accounting Standards at

31、tributed to (1) political process of standard-setting, (2) accounting principles and assumptions, and (3) conservatism Estimation Errors attributed to estimation errors inherent in accrual accounting Reliability vs Relevance attributed to over-emphasis on reliability at the loss of relevance Earning

32、s Management attributed to window-dressing of financial statements by managers to achieve personal benefitsAccounting AnalysisSources of Analysis Objectives Comparatives Analysis demand for financial comparisons across companies and/or across time Income Measurement - demand for (1) equity wealth ch

33、anges and (2) measure of earning power. These correspond to two alternative income concepts(1) Economic Income (or empirically, economic profit)(2) Permanent Income (or empirically, sustainable profit)Chapter 6 discusses these measures in detailAccounting AnalysisEarnings Management Frequent Source

34、of DistortionThree common strategies: Increasing Income managers adjust accruals to increase reported income Big Bath managers record huge write-offs in one period to relieve other periods of expenses Income Smoothing managers decrease or increase reported income to reduce its volatilityAccounting AnalysisEarnings Management Motivations Contracting Incentives - managers adjust numbers used in contracts that affect their wealth (e.g., compensation contracts) Stock Prices managers adjust numbers to influence stock prices for personal benefits (e.g., me