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Management has latitude under GAAP in selecting accounting methods. What are the different areas in which different methods can affect the reporting of financial reports?
Generally Accepted Accounting Principles (GAAP) is a general set of accounting rules which are accepted by the majority accountants. Management in most companies and organizations apply GAAP to create financial statements. In fact, publicly owned companies and state companies are required to stick to GAAP guidelines. However, privately owned organizations are not necessarily required to produce financial reports that follow GAAP standards.
Pfizer Inc. is a research based international biopharmaceutical company that is engaged in the discovery, development and manufacture of health care products. In Pfizer, some of the principal areas that GAAP may cover on financial reports are net income attributable to Pfizer, debts, cost of sales, expenses, investments and taxes. For example, GAAP may require that costs in Pfizer be determined on the basis of when a payment was made, and not on the basis of inflation levels. Or, it may dictate that daily sales be reported at the same time when sales for any other related asset is being made. GAAP adjustments guides Pfizer accountants and management on how financial components should be measured, and how they should be represented in a financial statement (United States Securities and Exchange Commission, 2020).
What are some of the potential warning signs that you see in the form 10-K financial statements for the company that you selected for the Company Analysis Project?
Form 10-K is a comprehensive report that is filed annually by public companies indicating their financial performances for that period (Jorrison, 2019). The report is more detailed thus deemed more sufficient compared to the preparation of an annual report. It reveals the likelihood of a firm going into losses. For the Pfizer Inc., the company is able to foresee potential warning signs in as far as profits and losses are concerned. The company should be concerned about the cost and expense control, and non-ordinary events. Projected growth in costs and expenses, product withdrawals, recalls and other unusual events resulting from organizational restructuring and evolving business strategies may affect future results. This is because market for their pharmaceuticals products are based on evolving market structures. Auditors regard the 10- K form as an important tool for analysts and investors, since they use it to make vital investment decisions. Finally, the Form 10-K reveals the company’s history, organizational structure and executive compensation.
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 10-K report for the company that you selected for the Company Analysis Project reveal shareholders and analysts? Should the auditor’s report contain more or less information?
The main purpose of GAAP in a company’s financial statements is to ensure that it uses similar set of financial reporting standards with others (United States Securities and Exchange Commission, 2020). An analyst should review the auditor’s opinion in a company’s financial statement with an aim of reviewing the responsibility of management and audit firm. According to the GAAP guidelines, the auditor’s opinion can either be an unqualified opinion, qualified or an adverse opinion. However, the accounting firm gives an unqualified opinion by stating that the company’s financial statements are presented fairly, in all material aspects, and conforms to U.S. GAAPs. The materiality of the consolidated financial statements is vital since it would allow external stakeholders such as investors, analysts and regulators to compare their performances. The auditor’s report contains enough information that reveals the reliability of the company’s financial statements for use by internal and external stakeholders.
Why is it important for an analyst to carefully examine the non- recurring transactions including write- downs, accounting changes and extra- ordinary items? What write-downs, accounting changes and extra ordinary items are revealed in the form 10K report for the company that you selected for the Company Analyst Project?
Non- recurring transactions are those that are likely not to happen, such as write-downs, accounting changes and extra-ordinary items. It is vital for an analyst to note them when analyzing Pfizer’s financial statements because management has some flexibility in making reports for such transactions. They may easily skew Pfizer’s profitability for the accounting period if positively obtained.
A write- down refers to an accounting transaction whereby a value of an asset is reduced in order to match the current market value. In Pfizer Inc., some of the write-downs noted in the Form 10-K include assets such as machines used to make vaccines and medicine. There are also extra-ordinary items such as the Covid-19 vaccine recorded in the report. Pfizer Inc. has also changed its accounts to include vaccines and medicine for modern diseases due to climatic changes around the globe (United States Securities and Exchange Commission, 2020).
References
Jorrison, A. N. (2019). Generally Accepted Accounting Principles (GAAP): Improving Business Reporting, Vol. 9 (23-45).
United States Securities and Exchange Commission (2020). Pfizer Inc. Form 10-K. Washington, D.C. 20549.
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