5.8 Reporting Financial Activity
3 min read•june 18, 2024
Financial reporting principles and requirements are crucial for maintaining transparency and accountability in business. These guidelines ensure companies provide accurate, timely, and consistent financial information to stakeholders, enabling informed decision-making and fair market practices.
Key components include accounting periods, reporting timing principles, and SEC requirements. Annual reports, comprising financial statements, notes, and management analysis, offer comprehensive insights into a company's financial health and performance. Accounting standards and regulatory bodies ensure adherence to established practices.
Financial Reporting Principles and Requirements
Types of accounting periods
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- represents a 12-month period used for financial reporting and budgeting that can differ from the , allowing companies to choose a reporting period that best suits their business cycle (retail companies may use a February to January fiscal year to include the holiday shopping season)
- Calendar year is an accounting period that aligns with the standard January to December calendar and is commonly used by many companies for simplicity and
- involves the division of the fiscal year into four three-month periods, providing more frequent updates on a company's financial performance and is required for publicly traded companies by the
Principles of financial reporting timing
- ensures that financial information is reported as soon as possible after the end of the accounting period, allowing stakeholders to have access to current and relevant information for decision-making
- Consistency requires companies to use the same accounting methods and reporting periods across time, enabling meaningful comparisons of financial performance between different periods
- considers financial information as material if its omission or misstatement could influence the decisions of users, and material information must be disclosed in a timely manner to ensure transparency (significant changes in revenue or expenses)
- principle recognizes economic events regardless of when cash transactions occur, providing a more accurate picture of a company's financial position
SEC requirements for financial statements
- Annual report () is a comprehensive report filed annually with the SEC that includes audited financial statements, management's discussion and analysis (), and other relevant information
- Quarterly report () is filed with the SEC on a quarterly basis and contains unaudited financial statements and updates on the company's performance and risks
- Current report () is filed with the SEC to announce significant events or changes that may impact investors, such as mergers, acquisitions, changes in executive management, or bankruptcy filings
- mandate companies to provide comprehensive and accurate information to investors, promoting
Components of annual reports
- Financial statements include
- reports revenues, expenses, and net income over a specific period
- presents a company's assets, liabilities, and shareholders' equity at a specific point in time
- shows the inflows and outflows of cash from operating, investing, and financing activities
- details changes in a company's equity accounts over a specific period
- Notes to the financial statements provide additional information and explanations to help users better understand the financial statements, including details on accounting policies, segment information, and contingent liabilities
- Management's discussion and analysis (MD&A) offers management's perspective on the company's financial performance, risks, and future prospects, providing context and insights beyond the numbers presented in the financial statements
- is an independent opinion issued by an external auditor on the fairness and accuracy of the financial statements, assuring stakeholders that the financial statements are free from material misstatement
Accounting Standards and Regulatory Bodies
- are the standard framework of guidelines for financial accounting used in the United States
- are a set of accounting standards developed by the International Accounting Standards Board (IASB) for use in many countries outside the United States
- Securities and Exchange Commission (SEC) is the primary regulator of the U.S. securities markets, enforcing federal securities laws and proposing securities rules
Key Terms to Review (25)
Accrual Accounting: Accrual accounting is a method of accounting that records revenues and expenses when they are earned or incurred, regardless of when the actual cash payment is received or made. This contrasts with cash-basis accounting, which records transactions only when cash is exchanged.
Apple, Inc.: Apple, Inc. is a multinational technology company known for its innovative products such as the iPhone, MacBook, and Apple Watch. It is also one of the largest publicly traded companies by market capitalization.
Auditor's Report: An auditor's report is a formal written opinion document prepared by an independent auditor that communicates the results of their examination and evaluation of an organization's financial statements. It serves as the primary means of communicating the auditor's findings and conclusions to the stakeholders regarding the fairness and accuracy of the financial information presented.
Balance sheet: A balance sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time. It lists assets, liabilities, and shareholders' equity to give insights into the company's financial stability.
Balance Sheet: The balance sheet is a financial statement that provides a snapshot of a company's assets, liabilities, and shareholders' equity at a specific point in time. It is a fundamental tool for understanding a company's financial position and is essential for analyzing its financial health and performance.
Calendar Year: A calendar year is a 12-month period that begins on January 1st and ends on December 31st. It is the standard unit of time used for financial reporting and accounting purposes, providing a consistent framework for organizations to track and analyze their financial activities over a defined period.
Consistency: Consistency refers to the principle of using the same accounting methods and practices over time, ensuring that financial statements are comparable across periods. This principle helps in creating a reliable and transparent financial reporting system, allowing stakeholders to assess the organization's performance accurately and make informed decisions based on historical data.
Disclosure Requirements: Disclosure requirements refer to the information that organizations are legally obligated to provide to the public, regulators, and other stakeholders regarding their financial activities and performance. These requirements aim to ensure transparency and accountability in financial reporting.
Financial Transparency: Financial transparency refers to the open and clear communication of an organization's financial information, including its income, expenses, assets, liabilities, and overall financial performance. It is a critical aspect of corporate governance and accountability, allowing stakeholders to make informed decisions about the organization's financial health and stability.
Fiscal Year: The fiscal year is the 12-month period that an organization, such as a government or a business, uses for accounting and budgeting purposes. It is the period over which annual financial statements are prepared and reported, and it is often different from the calendar year.
Form 10-K: Form 10-K is an annual report required by the U.S. Securities and Exchange Commission (SEC) that provides a comprehensive overview of a public company's financial performance and business operations. It is a critical document for understanding a company's financial health and its position within domestic and global markets.
Form 10-Q: Form 10-Q is a quarterly financial report that publicly traded companies are required to file with the U.S. Securities and Exchange Commission (SEC). It provides an update on a company's financial performance and operational activities, serving as a key source of information for investors and regulators about the company's current state of affairs.
Form 8-K: Form 8-K is a report that public companies in the United States must file with the Securities and Exchange Commission (SEC) to announce major events that shareholders should know about. It is an essential tool for companies to communicate significant corporate developments to the market and investors in a timely manner.
Generally Accepted Accounting Principles (GAAP): Generally Accepted Accounting Principles (GAAP) are the standard framework of guidelines, rules, and procedures for financial accounting used in any given jurisdiction. GAAP provides a common set of accounting principles, standards, and procedures that companies must follow when compiling and reporting their financial statements, ensuring consistency and comparability across organizations.
Income statement: An income statement is a financial document that summarizes a company's revenues, expenses, and profits over a specific period. It provides insight into the company’s operational efficiency and profitability.
Income Statement: The income statement, also known as the profit and loss statement, is a financial report that summarizes a company's revenues, expenses, and net profit or loss over a specific period of time. It is a crucial document that provides insights into a company's financial performance and profitability.
International Financial Reporting Standards (IFRS): International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) to provide a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. These standards are relevant in the context of when a company should capitalize or expense an item, as well as how a company should report its financial activity.
Management discussion and analysis (MD&A): Management Discussion and Analysis (MD&A) is a section of a company's annual report where management provides an overview of the financial activities and performance. It offers insights into the company's operations, financial condition, and future prospects from the perspective of management.
Materiality: Materiality is a fundamental concept in accounting that refers to the significance or importance of financial information. It is used to determine whether an item or transaction is significant enough to be disclosed or reported in a company's financial statements.
MD&A: MD&A, or Management's Discussion and Analysis, is a section within a company's financial reporting that provides a narrative explanation of the company's financial performance, financial condition, and cash flows. It serves as a crucial component in understanding a company's financial position and future prospects.
Quarterly Reporting: Quarterly reporting refers to the financial statements and disclosures that publicly traded companies are required to provide on a quarterly basis. These reports give investors and regulators insight into the company's financial performance and position over a three-month period, allowing for more frequent monitoring compared to annual reporting.
Securities and Exchange Commission (SEC): The Securities and Exchange Commission (SEC) is an independent agency of the United States federal government that is responsible for regulating the securities industry, including the stock market, to protect investors and maintain fair and orderly functioning of securities markets.
Statement of Cash Flows: The statement of cash flows is a financial statement that provides information about a company's cash inflows and outflows during a specific period. It shows how changes in the balance sheet and income statement accounts affect the company's cash and cash equivalents, and categorizes the sources and uses of cash into operating, investing, and financing activities.
Statement of Shareholders' Equity: The statement of shareholders' equity, also known as the statement of changes in stockholders' equity, is a financial statement that outlines the changes in a company's shareholders' equity accounts over a specific reporting period. It provides information about the sources and uses of equity capital, allowing investors and analysts to understand how a company's net worth has changed over time.
Timeliness: Timeliness refers to the quality of being prompt, punctual, and up-to-date in the context of financial reporting. It is a crucial aspect of providing relevant and useful information to stakeholders, as the value of financial data diminishes over time.