Financial Accounting: An Integrated Statements Approach, 2nd Edition

liquidity and capital resources. In addition, the MDA

discusses significant risk exposure. For example, Pixar

has identified fluctuations in interest rates as a risk fac-

tor influencing the value of its investments.

A new subsection of the MDA required by the

Sarbanes-Oxley Act must now include a section describing

any “off-balance-sheet” arrangements. Such arrangements

are discussed in advanced accounting courses.

Report on Adequacy of

Internal Control

As discussed in Chapter 7, the Sarbanes-Oxley Act of

2002 requires management to provide a report stating

their responsibility for establishing and maintaining

internal control. In addition, the report must state man-

agement’s conclusion concerning the effectiveness of

internal controls over financial reporting. The act also

requires a public accounting firm to examine and ver-

ify management’s conclusions regarding internal con-

trol. Thus, public companies must provide two reports,

one by management and one by a public accounting firm certifying the management

report as accurate. Both reports for Pixar are included in the annual report on their

Web site.

Report on Fairness of Financial Statements

In addition to a public accounting firm’s internal control report, all publicly held corpo-

rations are also required to have an independent audit (examination) of their financial

statements. For the financial statements of most companies, the CPAs who conduct the

audit render an opinion on the fairness of the statements. An opinion stating that the

financial statements fairly represent the financial condition of a public company is said

to be an unqualified, or “clean,” opinion. The Independent Auditors’ Report for Pixar

is included in the annual report on their Web site. Pixar’s auditors gave the company

an unqualified opinion.

654 Chapter 14 Financial Statement Analysis

One Bad Apple

A recent survey by CFOmagazine reported that 17% of chief

financial officers have been pressured by their chief executive

officer to misrepresent financial results, while only 5% admit to

knowingly violating generally accepted accounting principles.

INTEGRITY, OBJECTIVITY, AND ETHICS IN BUSINESS

SUMMARY OF LEARNING GOALS

Construct and interpret horizontal and vertical analy-

ses.The analysis of percentage increases and decreases

in related items in comparative financial statements is called

horizontal analysis. The analysis of percentages of

component parts to the total in a single statement is called

vertical analysis. Financial statements in which all amounts

are expressed in percentages for purposes of analysis are

called common-size statements.

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