The SEC requires full disclosure from companies that wish to be publicly traded on the major U.S. Exchanges. By enforcing the rule, the SEC attempts to instill confidence in investors that the financial marketplace is efficient and transparent so that individual investors can take part in it for material profit. How does full disclosure affect financial reporting?
Full disclosure affects financial reporting with financial facts significant enough to influence the judgment of the informed reader. And sometimes the information given can be difficult for users to absorb the information. Some say it is information overload. Companies making it difficult for the reader. Are there any ethical implications to what must be reported in order to comply with full disclosure? Explain. The ethical implications could be a company having a poor quality rating and investors pulling their stocks and investments. An example, Coach, Inc. that stopped reporting separate sales from regular stores and factory outlets. Investors had a hard time determining from the financial statements the source of Coach’s sales growths.
The stock price for the company suffered. What recommendations would you make to management regarding what must be disclosed? Recommendations to management about what information needs to be disclosed would be the information that would help the company. The accounting procedures should be disclosed. Any information that can cause confusion to an investor should not be disclosed. And management could test this out on managers in different departments that do not have an understanding of the disclosure and financial reporting.
Discussion Question # 2
What are the limitations of using ratios for financial statement analysis? Financial ratios provide a limited analysis of the company financial statements. These ratios calculate numerical indicators or percentage values based on the financial information contained in the statements. Small business owners may find it difficult to compare their information to another company. Different companies operate in different industries. Financial accounting information is affected by estimates and assumptions. Ratio analysis explains relationships between past information while users are more concerned about current and future information. What are the benefits?
The benefits of using ratios would be the ratios simplifies the financial statements. Ratios help compare companies of different size with each other. Ratios help in trend analysis which involves comparing a single company over a period. Ratios highlight important information in simple form. Do different user groups focus on different ratios? Why?
Yes, different user groups do focus on different ratios to use. Management looks at turnover and operating performance ratios. Shareholders look at the profitability ratios. Debt holders and suppliers look at cash flow and liquidity. Credit rating agencies look at the solvency ratios. Which ratios would you use to analyze a company? Why?
Common size ratios make comparisons more meaningful and provide a context for the company’s data. Current ratio is another one to analyze a company. The current ratio is a reflection of financial strength, the number of times a company’s current assets exceed its current liabilities. Quick ratio or acid test ratio tests whether a business can meet its obligations even if adverse conditions occur. I would use these ratios to analyze a company.