FINC 421 Week 2 Discussions

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School

University of Maryland *

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Course

421

Subject

Accounting

Date

Apr 3, 2024

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docx

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Uploaded by ChancellorInternet4534

1. Management has latitude under GAAP in selecting accounting methods. What are some of the areas in which different methods can affect the reporting of financial results? Management has discretion under GAAP in choosing accounting methods that ultimately impact the company’s financial reporting. According to (Evans et al., 2012) “earnings management occurs when management uses either its reporting discretion (accruals) or its influence over operating, investing, or financing decisions (real activities) to achieve a desired reporting outcome.” Areas affected include: - Revenue recognition including point of sale, completion of services, or installment sales. Recognizing revenue upfront against overtime would impact the profitability ratios and cash flow. - Depreciation methods either straight-line, double-declining balance, or units-of- production depreciation methods impact the division of asset costs over their useful lives, influencing reported expenses and profitability. - Inventory valuation methods such as FIFO (First-In, First-Out), LIFO (Last-In, First- Out), or weighted average result in a difference between inventory valuation and cost of goods sold. LIFO manages to match recent costs with revenues, altering reported profitability during inflationary periods. - Lease accounting - The choice between capitalizing leases (as assets and liabilities) versus treating them as operating leases can significantly impact balance sheet figures such as assets, liabilities, and key financial ratios like leverage. - Management's assessment of goodwill impairment involves approximating the fair value of reporting units. Different valuation methods or assumptions can lead to variations in impairment charges, affecting reported net income and asset values. - Variations in tax accounting methods, such as deferred tax assets or liabilities recognition, tax credits utilization, and uncertain tax positions, can impact reported income tax expenses and effective tax rates. - Valuation methods for financial instruments like investments or derivatives, such as fair value through profit or loss (FVTPL), fair value through other comprehensive income (FVOCI), or amortized cost, can lead to different income statements and balance sheet impacts. - Accounting methods for pension plans, post-employment benefits, or stock-based compensation can affect reported expenses, liabilities, and shareholders' equity. Each of these areas presents opportunities for management to exercise judgment in selecting accounting methods that align with their objectives while complying with GAAP. Nevertheless, such options also raise apprehensions about transparency, comparability, and the possibility of earnings management. Different methods can influence reported profits, asset values, and financial ratios (e.g., profitability, liquidity).

2. What are some of the potential warning signs that you see in the Form 10K financial statements for the company that you selected for the Company Analysis Project? Some of the potential warning signs that I see in the Form 10K financial statements for Coca- Cola, the company I am analyzing for my project are: - I notice in the notes that the sales of the company’s ready-to-drink beverages are to some extent seasonal as the volume of sales is affected by weather conditions. Since the industry is highly competitive in nature the commercial beverage industry consists of numerous companies, whether small or up-and-coming, to very large and well- established. If Coca-Cola is not successful in its innovative activities, its financial results could be negatively impacted. - Global economic conditions can affect the business operating results, financial condition, and liquidity unfavorably. - If there is a change in the retail landscape or the loss of key retail or food service, customers could adversely affect Coca-Cola's financial results. - If the company is unable to expand the business in emerging and developing markets, the growth could be negatively affected. 3. Why is it important for an analyst to review the "Auditor's Opinion" in a company's financial statements? What does the Auditor's Opinion in the Form 10K report for the company that you selected for the Company Analysis Project reveal to shareholders and analysts? Should the Auditor's Opinion contain information? An analyst needs to review the auditor’s opinion because qualified or adverse opinions will indicate to the shareholders and analysts that the financial statements are either fully or partially unreliable and, respectively, have some relative demerits. In situations where there is an unqualified opinion, it tells the analyst that they can have reasonable assurance that the financial reports are free of any material misstatement and thus it provides the most common outcome and has some distinct benefits. The auditors’ opinion for Coca-Cola’s Financial Statements states that “the consolidated financial statements were presented fairly, in all material respects, and the financial position of the Company on December 31, 2023, and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, is in conformity with U.S. generally accepted accounting principles. The auditor’s report is usually detailed and provides details about the condition of the company’s finances or relevant additional information to support its opinion. 4. Why is it important for an analyst to carefully examine the non-recurring transactions including write-downs, accounting changes, and extraordinary items? What write-

downs, accounting changes, and extraordinary items are revealed in the Form 10K report for the company that you selected for the Company Analysis Project? It is important for an analyst to carefully examine the non-recurring transactions including write- downs, accounting changes, and extraordinary items because these non-recurring transactions can affect a company's profitability and they do not come about from normal operations but are usually caused by infrequent and unusual events. Also, during the assessment of these non- recurring transactions, it may be found that these types of transactions may recur in the future. A review of Coca-Cola's Form 10K report revealed the following non-recurring item: As of December 31, 2023, the Company’s bottling operations in the Philippines and Bangladesh and certain bottling operations in India met the criteria to be classified as held for sale and are expected to be franchised during the first quarter of 2024. This is reflected on the balance sheet as a reduction in Assets costs and income activities on the cash flow statement. (FORM 10-K – Coca-Cola, 2023). 5. What are the most important things you learned from the study of this week's readings, discussions, and assignments? This week's reading discussions and assignments have taught me a lot about the importance of reviewing financial statements and ensuring they are prepared to the set standards of generally accepted accounting practices. Management therefore makes judgments in applying accounting policies by gathering and analyzing information, assessing accounting guidance, following a thorough decision-making process, documenting and communicating the judgment, and reviewing and monitoring the judgment for continued appropriateness. Going through Coca-Cola’s Form 10k is interesting as I am gaining more insight on how to review and analyze financial statements and thus form an opinion. References: Coca-Cola Form 10K 2023. https://www.sec.gov/ix?doc=/Archives/edgar/data/21344/000002134424000009/ko- 20231231.htm GAAP, Chap. 6. Other Western Accounting Systems and their limitations. https://www.peoi.org/Courses/Coursesct/finanal/ch/ch6z.html

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