How People Make Financial Decisions - Research Paper Example

How People Make Financial Decisions The Disclosures in the Financial Statement of LG Electronics, Inc. (LG) Abstract This study looks on the Disclosure Statement in the Financial Statement of the LG Electronics Inc. for the period 2008 and 2009. The Notes to the Financial Statement comes as subsidiary information of the Financial Statement of Company and is prepared by an independent auditor contracted by the company. It is presented as a narrative explanation of the figures in the statement. The study is limited to the disclosure that is related to cash and cash equivalent, receivables and inventories of the company for the two year period. The Notes to the Financial Statement include findings of the Auditor on accounting practices used by the company. The Notes help interested stockholders understand the underlying reasons for changes and variations and to relate to the methods used by the company. LG Electronics follow the accepted accounting procedures of the Republic of Korea, and may not conform to those used by other countries. In the end, a disclosure helps investor to make decisions on investing to a company. Introduction The company selected for the study is LG Electronics, Inc. (LG), a company that is publicly listed in SE, LSE and NYSE. The disclosure of the Auditor is found in the Financial Statement of the company for the period 2008 and 2009. The financial statements of LG Electronics were originally presented in Korean language but have been condensed and restructured in English. In the introductory notes, Auditor stated that the company used the accepted accounting principles and standards of the Republic of Korea that may not conform with the standards used by other countries. In other countries, mandatory disclosures are generally required to all publicly traded corporations by the international GAAP and the Financial Accounting Standards Board (FASB). GAAP, for instance requires that disclosures be made for certain items in the FS such as accounting changes or errors, asset retirement and insurance contract modifications. Disclosures in the financial statement are explanatory notes provided by the Auditor to clarify or interpret certain published financial information. It is a requirement of the Securities and Exchange Commission to help out those needing financial information for the purpose of making investments in the business. The FS normally carries two kinds of disclosures, the mandatory and voluntary disclosures. FASB looks at the voluntary disclosures that cover the overall company health, management’s analysis of company data and forward-looking statements of the company and is most useful to outsiders who need information on the performance of the company. (“What is…” n.d.) The disclosures procedures of the LG Electronics in their 2008-2009 financial statement related to cash and cash equivalent, receivables and inventories, I have found, does not differ much with that being used by international standards, the GAAP. For example, both system, Korean and GAAP defines what items are included in the definition of cash equivalent Cash and cash equivalent. In the disclosures in Cash and Cash equivalent, the LG Note includes a statement of what constitutes its cash and cash equivalent. Cash are those on hand and deposited in banks, while cash equivalent are short term financial instruments with a maturity of three months or less. GAAP has the same definition for short term financial instruments. Receivables. The notes to Financial Statement mentioned that the company uses a method to account for the risk of uncollectible accounts receivable from customers. However, the method of impairment was not clearly illustrated but the carrying amount is reported. The disclosure only mentioned that the company sets an allowance for doubtful accounts from notes receivable based on estimates gathered through a “reasonable and objective method”. Inventories. The notes described valuation of inventories the company is using, that is, the perpetual and the periodic inventory. The Note also indicated the method used by the company in determining the cost of inventories which is the Weighted Average Cost per Unit. The WACP is calculated by dividing the cost of the goods available for sale by the number of units available for sale (WACP) Securities. The Note describes debt and equity securities the company holds which are classified into three categories: trading, available for sale and that held-to-maturity. Note explained the valuation used in arriving at the cost of these securities which is the moving-weighted-average method. Trading securities are treated as current assets while others are long term assets. The Note also provided an explanation on how gains and losses of trading securities are recognized in the financial statements. The Note also gave an account on how the held-to-maturity securities are amortized at cost, while available for sale and trading securities are measured at fair value. The components of the company’s cash and cash equivalent The components of cash and cash deposited in the bank are coming from proceeds of short and long term financial instruments. An explanation on this shows that these are restricted amounts deposited for maintaining checking accounts, various short-term borrowings and long term debts, and research and development funds funded by the Korean government. Cash equivalent of the company consist of short term investments, receivables, and inventories. Short term investments as shown in the Note are government bonds that are more in 2009 than in 2008. The receivables module are trade accounts and notes receivables, other accounts receivable, advance payments, short term loans receivable, long-term loans receivables and others. Explanatory notes for these items are found separately. For instance, in the Consolidated Financial Statement, what appears is the carrying value, but in the explanatory note, a presentation is shown on how it is at arrived at is given. The presentation shows an amount is allotted as allowance for doubtful account and is deducted from the original amount to come out with the reported carrying value. This method is applied to all the components of receivables. I have observed that the trade and notes payables accounts for the largest receivables of the company during the period. The Note 6 that followed explained that the company had engaged with accounts receivable selling program with the Societe General Bank, Sumitomo Bank and J.P. Morgan Chase Bank, and used the receivables from their subsidiaries as securities. Inventories. Composition of inventories, in the Notes, are merchandise and finished products, work-in-process, raw materials and supplies and other related items. The Note explains that the carrying value reported in the Financial Statement is the amount arrived at after deducting the inventory valuation allowance. The Note also explained that the inventories are all insured against risks. Shown below is a portion of the LGE Consolidated Statements of Financial Position that presents the current assets of the company. Source: LG Electronics Inc. & Subsidiaries, Consolidated Financial statements, December 31, 2009 and 2008. Conclusion When I looked at the financial statements of the LG Electronics for the first time, I was awed with the figures, and at the same time do not understand the figures it represent. As an investor, what is important is to have a clear understanding of the financial statements in simple terms and to know how they come up with that figures and assumptions. The explanatory note, or disclosure explained to me what the figures stand for, otherwise, the financial statement is meaningless. The Disclosure Statement gave me a better appreciation of the values and clearer perception of the operation of the company. It becomes the narrative of the whole procedure as it provides the financial picture of the company, the growth and future plans. Disclosure Statement helped me, as a future investor, to understand financial statements and make better decisions on investment. References Weighted Average Cost per Unit. Definition.Retrieved 16 September 2010 from http://www.answers.com/topic/weighted-average-inventory-method) LG Electronics Inc. LG Electronics Inc. & Subsidiaries, Consolidated Financial statements, December 31, 2009 and 2008. http://lg.com/global/ir/reports/financial-statements.jsp What Are Financial Statement Disclosures? | eHow.com http://www.ehow.com/about_5156814_financial-statement-disclosures.html#ixzz0zYRSS4KX Perpetual method of inventory is defined “as an accounting method of maintaining up-to-date property records that accurately reflect the level of goods on hand” This is a method wherein the current balance of inventory is sustained daily by the addition of inventory to the account when goods are received and a deduction from the account when they are used. (Investopedia) This method differentiates from the periodic inventory wherein inventory is done in a periodic interval. The disclosure also reported that the company uses the weighted average cost per unit for the period wherein weighted average cost per unit for the period is the cost of the goods available for sale divided by the number of units available for sale. When the perpetual inventory system is used, the weighted average method is called the Moving Average method. An accounting method of maintaining up-to-date property records that accurately reflect the level of goods on hand. Investopedia Says: The current balance of inventory is sustained daily by the addition of inventory to the account when goods are received and the deduction from the account when they are used. This method, as opposed to a yearly or monthly calculation, allows for a company to have more timely and accurate data on inventories A method of inventory valuation for financial reporting purposes where a physical count of the inventory is performed at specific intervals. This accounting method for inventory valuation only keeps track of the inventory at the beginning of a period, the purchases made and the sales during the same period and is recorded under the asset section of the balance sheet. Investopedia Says: With this valuation method, it is much harder to track which individual items were destroyed or stolen, but a cross-reference can be made with the sales revenue to get a rough estimate of what was sold versus what was not. Many see this method as being inferior to the perpetual inventory method, which keeps track of inventory at the point of sale. This system is typically used by small businesses that can't afford or don't need an electronic tracking system (i.e. the bar code system). What are the disclosures of the audit team of the LG Electronics in their 2008-2009 financial statement that are related to cash and cash equivalent, receivables and inventories. What are the components of the company’s cash and cash equivalent. Identify. LG Electronics, Inc.(LG) is a global leader and technology innovator in consumer electronics, mobile communications and home appliances, employing more than 84,000 people working in 112 operations including 81 subsidiaries around the world. With 2008 global sales of $44.7 billion, LG comprises of five business units - Home Entertainment, Mobile Communications, Home Appliance, Air Conditioning and Business Solutions. LG is one of the world's leading producers of flat panel TVs, audio and video products, mobile handsets, air conditioners and washing machines. Topic:  How People Make Financial Decisions Instructions: Assignment: How People Make Economic Decisions Paper Resources: Internet Select a publicly held company to use as the basis for this assignment. Research your selected company and acquire the company’s most recent financial statements using the Internet. Prepare a 700- to 1,050-word paper analyzing the disclosures contained within the notes to the financial statements related to cash and cash equivalents, receivables, and inventories. Include a list identifying the components of the organization’s cash and cash equivalents. Format your paper according to APA standards. Include abstract, introduction, and conclusion paragraphs. OMG, please let this write up be a blessing to the customer. Outline of presentation 1. Identify the components of the organizationn’s cash and cash equivalent Cash equivalents are Highly liquid, very safe investments which can be easily converted into cash, such as Treasury Bills and money market funds. Read more: http://www.investorwords.com/767/cash_equivalents.html#ixzz0zYOzp5w9 2. Analyze disclosure contained within the notes to the financial statements related to cash and cash equivalents, receivables and inventories. 3. Question: what should be disclosed in the FS Disclosures in the financial statements are information required by the Securities and Exchange Commission to clarify or interpret financial data reported in the financial statements. It is a secondary information given by the Financial statement disclosures are secondary information provided by companies to clarify or interpret certain published financial information. Disclosures are designed to assist outside reviewers of financial information for the purpose of making investments in the business. Management also use disclosures to attest to the accuracy and validity of reported financial information as required by the Securities and Exchange Commission (SEC). Read more: What Are Financial Statement Disclosures? | eHow.com http://www.ehow.com/about_5156814_financial-statement-disclosures.html#ixzz0zYRSS4KX Mandatory Disclosures  Disclosures are required by GAAP for certain items in a financial statement, such as accounting changes or errors, asset retirement and insurance contract modifications. By requiring disclosures for these technical items, investors will have a clearer picture of the financial health of the company. Additionally, future expenses can be calculated so investors can determine long-term growth opportunities and projected cash outflows for a business. Voluntary Disclosures  The Financial Accounting Standards Board (FASB) recently noted that several companies were including voluntary disclosures regarding their businesses in financial reports. Overall company health, management's analysis of company data and forward-looking statements are some of the important voluntary disclosures found by FASB. This information is disclosed for those outside the company to gauge how the company will perform in future years. This helps to draw more investors than using only mandatory financial statement disclosures. SEC Guidelines  Publicly traded companies are required to make more financial statement disclosure (compared to privately held companies) for the benefit of outside investors. Since the accounting scandals of Enron and Worldcom, the SEC has focused on companies disclosing information about the relationship with their public audit firm to determine proper independence. Several guidelines were reviewed and published in an SEC bulletin released in 2001 outlining the importance of these non-financial disclosures. SOX Disclosures  When the Sarbanes-Oxley Act of 2002 (SOX) was passed, the SEC added additional non-financial disclosures for publicly traded companies. The majority of these disclosures required companies to state the role of management in the business and to declare if they are considered "financial experts." Companies are also required to issue a report stating that management finds the financial information to have adequate internal controls, ensuring accurate reporting. Read more: What Are Financial Statement Disclosures? | eHow.com http://www.ehow.com/about_5156814_financial-statement-disclosures.html#ixzz0zYMVbBWc Read More