awareness of the financial reporting environment in a market economy
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Financial accounting theory презентация
Содержание
- 1. Financial accounting theory
- 2. © 2006 Pearson Education Canada Inc. Chapter 1 Introduction
- 3. © 2006 Pearson Education Canada Inc. Some
- 4. © 2006 Pearson Education Canada Inc. Organization of the Book
- 5. © 2006 Pearson Education Canada Inc. Information
- 6. © 2006 Pearson Education Canada Inc. User
- 7. © 2006 Pearson Education Canada Inc. Role
- 8. © 2006 Pearson Education Canada Inc. The
- 9. © 2006 Pearson Education Canada Inc. ENRON CORP. Implications for Accountants
- 10. © 2006 Pearson Education Canada Inc. Enron,
- 11. © 2006 Pearson Education Canada Inc. Enron,
- 12. © 2006 Pearson Education Canada Inc. ENRON,
- 13. © 2006 Pearson Education Canada Inc. ENRON,
- 14. © 2006 Pearson Education Canada Inc. ENRON,
- 15. © 2006 Pearson Education Canada Inc. ENRON,
- 16. © 2006 Pearson Education Canada Inc. ENRON,
- 17. © 2006 Pearson Education Canada Inc. ENRON,
© 2006 Pearson Education Canada Inc.
Chapter 1
Introduction
Слайд 3© 2006 Pearson Education Canada Inc.
Some Historical Perspective
Paciolo, 1494
English Corporations Acts
Compulsory
audit
Developments in the United States
Corporate income tax, 1909
SEC, 1934
The search for accounting principles
Developments in the United States
Corporate income tax, 1909
SEC, 1934
The search for accounting principles
Слайд 5© 2006 Pearson Education Canada Inc.
Information Asymmetry
Two Main Types
Adverse selection
Persons with
an information advantage exploit this advantage
Insider trading
Moral hazard
Manager knows his/her actions in managing firm but shareholders do not
Manager shirking
Insider trading
Moral hazard
Manager knows his/her actions in managing firm but shareholders do not
Manager shirking
Слайд 6© 2006 Pearson Education Canada Inc.
User Decision Problem
In Presence of Adverse
Selection
Rational investment decision
In Presence of Moral Hazard
Motivate and evaluate manager performance
Rational investment decision
In Presence of Moral Hazard
Motivate and evaluate manager performance
Слайд 7© 2006 Pearson Education Canada Inc.
Role of Financial Reporting
To Control Adverse
Selection
Decision usefulness
Full and timely disclosure
To Control Moral Hazard
Net income as a managerial performance measure
Sensitive and precise net income
Decision usefulness
Full and timely disclosure
To Control Moral Hazard
Net income as a managerial performance measure
Sensitive and precise net income
Слайд 8© 2006 Pearson Education Canada Inc.
The Fundamental Problem Of Financial Accounting
Theory
The best measure of net income to control adverse selection not the same as the best measure to motivate manager performance
This implies that investor and manager interests conflict
Standard setting viewed as mediating the conflicting interests of investors and managers in financial reporting
Слайд 10© 2006 Pearson Education Canada Inc.
Enron, Cont’d.
Special Purpose Entities Associated with
Enron
On Enron Books
Dr Note Receivable $1.1 (billion) Cr. Capital Stock $1.1
Capital stock issued to Special Purpose Entity (SPE) (a limited partnership)
SPE owned by Enron officers
On Enron Books
Dr Note Receivable $1.1 (billion) Cr. Capital Stock $1.1
Capital stock issued to Special Purpose Entity (SPE) (a limited partnership)
SPE owned by Enron officers
Слайд 11© 2006 Pearson Education Canada Inc.
Enron, Cont’d.
GAAP requires amounts due from
shareholders be deducted from shareholders’ equity
Is a limited partnership, owned by Enron officers, a shareholder?
Is a limited partnership, owned by Enron officers, a shareholder?
Слайд 12© 2006 Pearson Education Canada Inc.
ENRON, Cont’d.
Off-Balance Sheet Financing
On SPE books:
Cash xxx
Debt xxx
SPE borrows money, using Enron stock as security.
Note payable to Enron xxx
Cash xxx
Cash is paid to Enron to reduce its note receivable from SPE
Enron has the cash but debt does not appear on its books
Debt xxx
SPE borrows money, using Enron stock as security.
Note payable to Enron xxx
Cash xxx
Cash is paid to Enron to reduce its note receivable from SPE
Enron has the cash but debt does not appear on its books
Слайд 13© 2006 Pearson Education Canada Inc.
ENRON, Cont’d.
Enron Renders Services to the
SPE
A/C receivable $628 (millions)
Net income $628
Services rendered to SPE 1997-2000 incl.
If Ltd. partnership had been consolidated, revenue only recognized when earned outside the consolidated entity.
A/C receivable $628 (millions)
Net income $628
Services rendered to SPE 1997-2000 incl.
If Ltd. partnership had been consolidated, revenue only recognized when earned outside the consolidated entity.
Слайд 14© 2006 Pearson Education Canada Inc.
ENRON, Cont’d
Enron records its share of
SPE profits
Investment in SPE xxx
Net income xxx
SPE profits include increases in fair value of its holdings of Enron shares.
Result: Enron includes increases in the market value of its shares in its net income.
Investment in SPE xxx
Net income xxx
SPE profits include increases in fair value of its holdings of Enron shares.
Result: Enron includes increases in the market value of its shares in its net income.
Слайд 15© 2006 Pearson Education Canada Inc.
ENRON, Cont’d
In 3rd quarter, 2001, Enron
Recognized that the SPE should be Consolidated:
Dr Shareholders’ equity $1.1
Cr Notes receivable $1.1
To deduct loan to SPE from shareholders’ equity
Also, restate previous 4 years’ earnings to reduce by $628 millions
Dr Shareholders’ equity $1.1
Cr Notes receivable $1.1
To deduct loan to SPE from shareholders’ equity
Also, restate previous 4 years’ earnings to reduce by $628 millions
Слайд 16© 2006 Pearson Education Canada Inc.
ENRON, Cont’d
Impacts of the Writeoffs
No effect
on operating cash flow
Debt/equity ratio, debt covenants affected
Loss of investor confidence
Share price falls from $90 to 66¢
bankruptcy protection 2 Dec/01
SEC, Dep’t of Justice, Congressional Investigations
Where were the auditors? The Board?
Debt/equity ratio, debt covenants affected
Loss of investor confidence
Share price falls from $90 to 66¢
bankruptcy protection 2 Dec/01
SEC, Dep’t of Justice, Congressional Investigations
Where were the auditors? The Board?
Слайд 17© 2006 Pearson Education Canada Inc.
ENRON, Concl.
Points to Think About
Crucial role
of investor confidence in financial information
Role of auditor in adding credibility to financial information
Off-balance sheet financing
Earnings management
Role of auditor in adding credibility to financial information
Off-balance sheet financing
Earnings management
