The Financial Reporting Process

The basic purpose of financial statements is to assist users in evaluating the financial position, profitability, and future prospects of a business. In the United States, the annual (and quarterly) financial statements of all publicly owned corporations are public information.

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* A balance sheet, showing at a specific date the financial position of the company by indicating the resources that it owns, the debts that it owes, and the amount of the owner's equity (investment) in the business.

All of the accounting information developed within a business is available to management. However, much of the company's financial accounting information also is used by decisioi makers outside of the organization. These outsiders include investors, financial analysts, investment advisors, creditors (lenders), labor unions, government agencies, and the public. Each of these groups either supplies money to the business or has some other interest in the financial health of the organization. A labor union, for example, needs information about i company's financial strength and profitability before negotiating a new labor contract.

* A statement of owner's equity, explaining certain changes in the amount of the owner's equity (investment) in the business. (In businesses which are organized as corporations, the statement of owner's equity is replaced by a statement of retained earnings).

* A statement of cash flows, summarizing the cash receipts and cash payments of the business over the same time period covered by the income statement.

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* An income statement, indicating the profitability of the business over the preceding year (or other period).

The principal means of reporting general-purpose financial information to persons outside a business organization is a set of accounting reports called financial statements. The persons receiving these reports are termed the users of the financial statements.

As part of the audit, the CPAs investigate the quality of the company's system of internal control count or observe many of the company's assets, and gather evidence both from within ;he business and from outside sources. Based upon this careful investigation, the CPA firm represses its professional opinion as to the fairness of the financial statements. This opinion, ;alled the auditors' reports, accompanies the financial statements distributed to persons outside he business organization.

In deciding where to invest their resources, investors and creditors often compare the financial statements of many different companies. For such comparisons to be valid the financial statements of these different companies must be reasonably comparable — that is, they must present similar information in a similar format. To achieve this goal, financial statements are prepared in conformity with a set of "ground rules" called generally accepted accounting principles (GAAP).

Supplying general-purpose financial information about a business to people outside the organization is termed financial reporting. In the United States and most other Cartier Replica industrialized countries, large "publicly owned" business organizations are required by law to make much of their accounting information public, that is, available to everyone. These countries also have enacted laws to ensure that the public information provided by these organizations is reasonably complete and reliable.

An audit is an investigation of a company's financial statements, designed to determine the "fairness" of these statements. Accountants and auditors use the term fair in Breitling Replica describing financial statements which are reliable and complete, conform to generally accepted accounting principles, and are not misleading.

Auditors do not guarantee the accuracy of financial statements; they only express their ixpert opinion as to the fairness of the statements. However, CPA firms stake their reputations m the thoroughness of their audits and dependability of their audit reports. Over many years, udited financial statements have established an impressive track record of reliability.

A set of financial statements consists of four related accounting reports that summarize in a few pages the financial resources, obligations, profitability, and cash transactions of a business. A complete set of financial statements includes:

What assurance do outsiders have that the financial statements issued by management provide a complete and reliable picture of the company's financial position and operating results? In large part, this assurance is provided by an audit of the company's financial statements, performed by a firm of certified public accountants (CPAs). These auditors are experts in the field of financial reporting and are independent of the company issuing the financial statements.

In addition, a complete set of financial statements includes several pages of notes, containing additional information which accountants believe is useful in the interpretation of the financial statements.

Small businesses are not required to provide general-purpose financial information to persons outside the organization. In fact, many small businesses do not make such information available. However, banks and other creditors often insist upon receiving this information as a condition for making loans to the business.