Professor Adams' Lecture Materials

LO2-04: Describe what accounting data is available.

Financial accounting data

Financial accounting data refer to materials prepared by a company to help decision makers external to the company, such as stockholders, banks, and suppliers.

Financial statement data

Financial statements are a collection of reports that communicate a company's financial results, condition, health, and cash flows. These include:

Balance sheet.
Income statement.
Statement of cash flows.
Statement of Stockholders' equity.

The Securities and Exchange Commission (SEC) is the US government agency charged with protecting investors by requiring full and truthful financial disclosure by companies. The SEC maintains a repository of financial information at its EDGAR website. (EDGAR stands for Electronic Data Gathering, Analysis, and Retrieval system.) Some data service providers, like Compustat and Yahoo! Finance, extract financial statement data from companies' SEC filings so that users can easily work with the data using software packages.

General journal and special journal entries and the general ledger

Journal entries provide a lot of useful data such as:

Which accounts were debited and credited,
amounts debited or credited,
who recorded the entry,
who approved the entry, and
when the entry was made.

A special journal is a journal where similar transactions can be recorded in an efficient manner (e.g., a sales, cash receipts, or cash disbursements journal). The general ledger summarizes all the journal entries, which forms the basis for the financial statements.

Image source: Richardson et al. (2021, p. 54)

Fixed asset subledger (or subsidiary fixed asset ledger)

A subsidiary ledger is an accounting ledger that details information on specific accounts with common characteristics. Each subsidiary ledger is associated with one and only one general ledger (G/L) account. For example, firms keep detailed records of their fixed assets (e.g., purchase date, depreciation method, accumulated depreciation) in a subsidiary fixed assets ledger.

Image source: Richardson et al. (2021, p. 56)

Receivables subledger (or subsidiary accounts receivable ledger)

The subsidiary accounts receivable ledger details information on the transaction and payment history of each customer to whom the company has extended credit.

Inventory subledger (or subsidiary inventory ledger) to estimate lower of cost or market and/or inventory obsolescence

The subsidiary inventory ledger details information on the inventory held by the company, including the purchase and sale of the inventory held by the company.

Financial accounting-related data

Corporate Securities and Exchange Commission (SEC) filings (10-Ks, 10-Qs, 8-Ks)

Publicly traded companies are required to submit financial reports to the SEC each year. This requirement is in place to ensure the typical investor has all of the information s/he needs to make investment decisions. The required annual submission is called Form 10-K. The 10-K has five required sections.

Business. An overview and description of the company's main operations.
Risk factors. A discussion of risks faced by the company (e.g., industry or macroeconomic risks).
Selected financial data. Highlights from the financial statements over the last five years.
Management's discussion and analysis of financial condition and results of operations (MD&A). Management explains its results from the most recent time period using their own words.
Financial statements and supplemental data. The company's audited financial statements, notes to the Financial Statements, and a report from the auditor explaining the results and scope of their audit.

Publicly traded companies are also required to provide financial reports to investors on a quarterly (i.e., every three months) basis as well. Form 10-Q is a submission to the SEC reporting a company's three month financial performance.

Finally, publicly traded companies are required to notify investors of important events or announcements not made in the ordinary course of business (e.g., the departure of a key executive, the acquisition of another company, a change in auditor). Form 8-K is a required submission the SEC that is used to notify investors of these items.

Conference call transcripts - Website links

An earnings call is a conference call between company management (e.g., CEO and CFO), analysts, investors, and media to discuss financial statement results. Analysts and investors have an opportunity to ask management questions during the call. Websites like Seeking Alpha provide transcripts of earnings calls and these transcripts are yet another source of data that can be used in data analysis.

Netflix, Inc. Q1 2021 Earnings Call Transcript

XBRL (eXtensible Business Reporting Language)

XBRL (eXtensible Business Reporting Language) is the computer-based standard used to define and exchange financial information between disclosing companies (e.g., Apple) and financial statement users (e.g., investors). XBRL requires that each number submitted by a company in its financial statements to accompanied by a "tag" explaining exactly what the number represents.

The SEC requires publicly traded companies to submit financial statements using XBRL. There are Excel "add-ins" that allow users to retrieve financial statement data from EDGAR automatically using XBRL tags (see example below).

Press releases

A press release is an official statement to the media from the company about a specific matter. Like earnings call transcripts, press releases are also another potential source of accounting data.

Example: Microsoft press release

Managerial accounting data

Managerial accounting data is information used for decision making by managers and leaders within an organization (e.g., CEO and CFO). There are many sources of managerial accounting data including budgets, standard costs, point-of-sale transactions, cost drivers, supply chain, customer relationship management (CRM), and human resources.

Budget data

Budgets are financial plans used to prioritize the needs of an organization for an upcoming time period.

Image source: Richardson et al. (2021, p. 61)

Standard cost data

A standard cost is a predetermined cost for the production of goods or services that serves as a benchmark against which to compare the actual cost.

Point-of-sale transaction data

Point-of-sale transaction data creates a stream of data from every transaction that occurs. For example, every sale recorded via a cash register at a Walmart is captured and analyzed by suppliers.

Data on potential cost drivers for allocating overhead

In managerial accounting, we learned that product costs are the aggregate of: (1) Direct material costs, (2) direct labor costs, and (3) manufacturing overhead costs (e.g., depreciation on machinery or utility costs for a production facility). Manufacturing overhead is an increasingly large source of indirect costs that need to be allocated to products and services. Activity-based costing (ABC) attempts to allocate indirect costs based on the activities that drive them (i.e., cost drivers). There is much data available within an organization on potential cost drivers (e.g., labor hours, customer calls, machine hours, product returns, number of inspections).

Supply chain data

The supply chain represents the process of getting products from raw materials to production to distribution to the ultimate delivery of the final product to the customer.

Customer relationship management (CRM) data

A customer relationship management (CRM) system is an information system for overseeing all interactions with current and potential customers with the goal of improving relationships. Data available:

Customer contact history.
Customer order history.
Customer level of trade discounts or payment terms.
Customer credit score.
Customer credit limit.
Customer payment history.

Human resource data

Companies also maintain data on their employees. A human resource management system (HRMS) is an information system for managing all interactions with current and potential employees. Data available:

Recruiting data and leads.
Employee training.
Payroll and compensation.
Employee benefits.
Annual reviews.
Absenteeism.
Career progression.
Employee satisfaction and sentiment.

Tax data

Tax accountants are interested in the impact of transactions and events on the amount of tax that is due and payable. Accounting transactions can affect tax in many different ways. Two examples are highlighted below.

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