Chapter 4 Accounting Information Systems 1737.An adjusted trial balance is prepared.
8.The financial statements are prepared.
9.Closing entries are prepared and recorded in the journal.
10.Closing entries recorded in the journal are posted to the ledger accounts.
11.A post-closing trial balance is prepared.EBITDA
In this chapter, we have illustrated the basic elements of transaction processing
and financial reporting accounting systems. The financial statements, which are used
by the company’s stakeholders, are the major product of these systems. However,
stakeholders often adjust financial statement data for use in their analyses. Such ad-
justments are called pro forma or “as if” computations. Because these pro forma com-
putations are adjustments to financial statements, they are not
in conformity with generally accepted accounting principles
(GAAP). However, a company may report non-GAAP pro
forma computations if it explains to investors why the addi-
tional disclosure would be useful to users. One common type
of pro forma computation that is used and reported is earn-
ings before interest, taxes, depreciation, and amortization
(EBITDA).
Many companies, such as AT&T, Time Warner, and
Goodyear Tire and Rubber, have debt terms that require them
to maintain some multiple of EBITDA. Thus, financial analysts
often use EBITDA as a rough estimate of operating cash flows
available to pay interest and other fixed charges.
Because the computation of EBITDA is not required by gen-
erally accepted accounting principles, its computation is not
subject to standardized rules, and thus may vary from com-
pany to company. For example, Safeway Storesstated the fol-
lowing regarding its computation of EBITDA in its disclosures
to the Securities and Exchange Commission: “Other companies
may define Adjusted EBITDA differently and, as a result, such
measures may not be comparable to Safeway’s Adjusted
EBITDA.”Describe and illustrate the
computation and use of
earnings before interest,
taxes, depreciation, and
amortization (EBITDA).
6
WorldCom, Inc.
In their public earnings announcements, companies have re-
cently focused on reporting EBITDA to outside investors. This
was done under the belief that EBITDA would be a more real-
istic measure of earning power in some industries with large
depreciation expenses, such as telecommunications. However,
alleged accounting fraud at WorldCom, Inc., has changed
perceptions. WorldCom is alleged to have caused nearly $4billion in costs to disappear when reporting EBITDA. As stated
recently by Chuck Hill, Director of Research at data provider
Thomson Financial/First Call, “I think the days of having EBITDA
being the focus of an earnings release are probably numbered.”Source:“Days May Be Numbered for EBITDA Numbers,” The Wall
Street Journal,July 5, 2002.INTEGRITY, OBJECTIVITY, AND ETHICS IN BUSINESS
Bernard J. Ebbers, former WorldCom chief
executive, appeared before the U.S. House
Committee on Financial Services on July 8,- His trial resulted in a conviction and a
25-year prison sentence for fraud, conspiracy,
and false filings with securities regulators.
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