5.8 Reporting Financial Activity

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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• Fiscal year represents a 12-month period used for financial reporting and budgeting that can differ from the calendar year, 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 consistency
• Quarterly reporting 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 Securities and Exchange Commission (SEC)

Principles of financial reporting timing

• Timeliness 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
• Materiality 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)
• Accrual accounting 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 (Form 10-K) is a comprehensive report filed annually with the SEC that includes audited financial statements, management's discussion and analysis (MD&A), and other relevant information
• Quarterly report (Form 10-Q) 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 (Form 8-K) 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
• Disclosure requirements mandate companies to provide comprehensive and accurate information to investors, promoting financial transparency

Components of annual reports

• Financial statements include
  1. Income statement reports revenues, expenses, and net income over a specific period
  2. Balance sheet presents a company's assets, liabilities, and shareholders' equity at a specific point in time
  3. Statement of cash flows shows the inflows and outflows of cash from operating, investing, and financing activities
  4. Statement of shareholders' equity 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
• Auditor's report 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

• Generally Accepted Accounting Principles (GAAP) are the standard framework of guidelines for financial accounting used in the United States
• International Financial Reporting Standards (IFRS) 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