Lecture Notes: Chapter 5 – Communicating and Analyzing Accounting Information
Based on Financial Accounting, 11th Edition by Libby, Libby, and Hodge
Introduction
Accounting does not stop at the creation of financial statements—it also involves effectively
communicating financial information to users. Chapter 5 of Financial Accounting by Libby,
Libby, and Hodge focuses on the people and processes involved in the accounting
communication cycle, the formats and content of corporate disclosures, and the analysis of
financial data using performance ratios like gross profit percentage and return on assets
(ROA). A clear understanding of these topics enables users—especially investors and analysts—
to interpret and evaluate a company’s financial health and trends.
1. The People Involved in the Accounting Communication
Process
1.1 Key Participants and Their Roles
Role Responsibility
Managers Prepare financial statements and disclosures.
Directors Oversee financial reporting and governance (Board of Directors).
Auditors Independently verify accuracy of financial statements.
Enforce legal and professional standards (e.g., SEC, CSA, FASB,
Regulators
IASB).
Information Analyze and distribute financial info (analysts, media, data
Intermediaries services).
Make decisions using financial data (investors, creditors,
Users
stakeholders).
1.2 Legal and Professional Guidance
These participants operate under legal frameworks and accounting standards, such as:
GAAP / IFRS: Governing rules for financial statement preparation.
Securities Regulators: e.g., the U.S. SEC or Canadian CSA enforce timely and truthful
disclosure.
Auditing Standards: Guide independent auditors (e.g., CPA Canada Handbook).
Corporate Law: Imposes fiduciary duties on directors and officers.
, Example:
A public company in Canada must comply with IFRS and submit quarterly filings to SEDAR+
(the Canadian equivalent of the SEC's EDGAR).
2. The Accounting Communication Process
2.1 Key Reporting Channels
Companies use multiple formats to communicate financial information to the public:
1. Press Releases
Announce key financial results (e.g., quarterly earnings, management commentary).
Often precede official filings.
2. Quarterly Reports
Include condensed financial statements, management discussion and analysis (MD&A).
Provide updates every 3 months for public companies.
3. Annual Reports
Comprehensive reports including audited financial statements, MD&A, notes to
financials, and sometimes sustainability reporting.
4. SEC/CSA Filings
U.S. companies use Form 10-K (annual) and Form 10-Q (quarterly).
Canadian companies use SEDAR+ filings like annual information forms, MD&A, and
audited statements.
5. Online Information Services
Platforms like Bloomberg, Yahoo Finance, and Morningstar provide investors with
access to financial data, ratios, and analysis.
Include automated data visualizations and industry comparisons.
2.2 Steps in the Communication Process
1. Internal Preparation: Managers finalize financial reports.
2. Board Review: Directors approve reports.
3. Audit: Independent auditors issue opinion.
Based on Financial Accounting, 11th Edition by Libby, Libby, and Hodge
Introduction
Accounting does not stop at the creation of financial statements—it also involves effectively
communicating financial information to users. Chapter 5 of Financial Accounting by Libby,
Libby, and Hodge focuses on the people and processes involved in the accounting
communication cycle, the formats and content of corporate disclosures, and the analysis of
financial data using performance ratios like gross profit percentage and return on assets
(ROA). A clear understanding of these topics enables users—especially investors and analysts—
to interpret and evaluate a company’s financial health and trends.
1. The People Involved in the Accounting Communication
Process
1.1 Key Participants and Their Roles
Role Responsibility
Managers Prepare financial statements and disclosures.
Directors Oversee financial reporting and governance (Board of Directors).
Auditors Independently verify accuracy of financial statements.
Enforce legal and professional standards (e.g., SEC, CSA, FASB,
Regulators
IASB).
Information Analyze and distribute financial info (analysts, media, data
Intermediaries services).
Make decisions using financial data (investors, creditors,
Users
stakeholders).
1.2 Legal and Professional Guidance
These participants operate under legal frameworks and accounting standards, such as:
GAAP / IFRS: Governing rules for financial statement preparation.
Securities Regulators: e.g., the U.S. SEC or Canadian CSA enforce timely and truthful
disclosure.
Auditing Standards: Guide independent auditors (e.g., CPA Canada Handbook).
Corporate Law: Imposes fiduciary duties on directors and officers.
, Example:
A public company in Canada must comply with IFRS and submit quarterly filings to SEDAR+
(the Canadian equivalent of the SEC's EDGAR).
2. The Accounting Communication Process
2.1 Key Reporting Channels
Companies use multiple formats to communicate financial information to the public:
1. Press Releases
Announce key financial results (e.g., quarterly earnings, management commentary).
Often precede official filings.
2. Quarterly Reports
Include condensed financial statements, management discussion and analysis (MD&A).
Provide updates every 3 months for public companies.
3. Annual Reports
Comprehensive reports including audited financial statements, MD&A, notes to
financials, and sometimes sustainability reporting.
4. SEC/CSA Filings
U.S. companies use Form 10-K (annual) and Form 10-Q (quarterly).
Canadian companies use SEDAR+ filings like annual information forms, MD&A, and
audited statements.
5. Online Information Services
Platforms like Bloomberg, Yahoo Finance, and Morningstar provide investors with
access to financial data, ratios, and analysis.
Include automated data visualizations and industry comparisons.
2.2 Steps in the Communication Process
1. Internal Preparation: Managers finalize financial reports.
2. Board Review: Directors approve reports.
3. Audit: Independent auditors issue opinion.
