Unit 4

• What is equity?

  what the company truly owns
• Equity formula?

  assets - liabilities
• What is the Statement of Retained Earnings?

  statement that breaks down the stockholder's equity into the amount that came from issuing new shares vs retained earnings
• What does the statement of retained earnings detail?

  the movement in owner's equity over a period
• Notes to the financial Statements document important accounting assumptions that were used in preparing the statements
• Annual reports are a review of the accounting process and the concept of GAAP
• Annual reports help understand how a company perceives itself
• GAAP is a common set of rules and a standard format for public companies to use when they prepare their reports
• Auditors are neutral third parties that check a firm's financial statements
• Why is GAAP so useful?

  because standardization makes it easier to compare the financial results of different firms
• Audit companies verify the Financial Statements and ensures compliance with laws
• How long can a business work with an auditing firm for?

  5 years max
• Rating companies make a financial forecast for a company and assign a grade based on financial position
• What are the 4 accounting scandals?

  Enron, WorldCom, Lehman brothers and Bernie Madoff scandals
• What happened in the Enron scandal?

  shareholders lost $74 billion
• How did the Enron scandal work?

  they kept huge debts off the balance sheet
• How was the Enron scandal caught?

  they were turned in by Sherron Watkins
• What was the outcome of the Enron Scandal?

  the company filed for bankruptcy
• What happened in the WorldCom scandal?

  they inflated assets by $11 billion
• Who was the main player in the WorldCom scandal?

  Bernie Ebbers
• How was the WorldCom scandal caught?


  they were caught by their internal auditing department
• What was the outcome of the WorldCom Scandal?

  the CFO was fired and Ebbers was sentenced ro 25 years of prison
• What happened in the Lehman brothers scandal?

  they hid over $50 billion in loans disguised as sales
• How was the Lehman brothers scandal caught?

  they went bankrupt
• What was the outcome of the Lehman brothers Scandal?


  bankruptcy
• What happened in the Bernie Madoff scandal?


  He tricked investors out of $64.8 billion
• How did the Bernie Madoff scandal work?

  investors were paid out of their own money
• How was the Bernie Madoff scandal caught?

  Madoff told his sons and they turned him in to the FBI
• What was the outcome of the Bernie Madoff Scandal?

  he was sentenced to 150 years in prison but died after 12