Prentice Hall's one-day MBA in finance & accounting by Michael Muckian, Prentice-Hall, inc

renders an accounting, or a summing-up, of their stewardship of the business entrusted to them by the investors in the business. The quarterly and annual financial reports of a business to its owners contain other information. However, the main purpose of a financial report is to submit financial statements to shareowners.
    Generally accepted accounting principles (GAAP) and financial reporting standards have been extensively developed over the last half century. These guidelines rest on one key premise—the separation of management of a business from the outside investors in the business. In the formulation of GAAP it is assumed that financial statements are for those who have supplied the ownership capital to a business but who are not directly involved in managing the business. Financial statements are prepared for the “absentee owners” of a business, in other words. GAAP and financial reporting standards do not ignore the need for information by the lenders to a business.
    41

    F I N A N C I A L R E P O R T I N G
    But the shareowners of the business are the main constituency for whom financial statements are prepared.
    Federal law governs the communication of financial information by businesses whose capital stock shares are traded on public markets. The federal securities laws are enforced mainly by the Securities and Exchange Commission (SEC), which was established in 1934. Also, the New York Stock Exchange, Nasdaq, and other securities markets enforce many rules and regulations regarding the release and communication of financial information by companies whose securities are traded on their markets. For instance, a business cannot selectively leak information to some stockholders or lenders and not to others, nor can a business tip off some of them before informing others later. The laws and requirements of financial reporting are designed to ensure that all stockholders and lenders have equal access to a company’s financial information and financial statements.
    A business’s financial statements may not be the first news about its profit performance. Public corporations put out press releases concerning their earnings for the period just ended before the company releases its actual financial statements.
    Privately owned businesses do not usually send out letters about profit performance in advance of releasing their financial statements—although they could do this.
    Financial Statements Example
    Chapter 3 introduced the external income statement for a business, followed by the internal management profit report for the business. Now the complete set of financial statements for the business is presented, which consists of the following:
    • Income statement for the year just ended (Figure 4.1)
    • Statement of financial condition at the close of the year just ended and at the close of the preceding year (Figure 4.2)
    • Statement of cash flows for the year just ended (Figure 4.3)
    • Statement of changes in stockholders’ equity for the year just ended (Figure 4.4)
    The income statement ranks first in terms of readability and intuitive understandability. Most people understand that profit equals revenue less expenses, although the technical jargon in 42

    I N T E R P R E T I N G F I N A N C I A L S T A T E M E N T S
    Sales revenue
    $39,661,250
    Cost-of-goods-sold expense
    $24,960,750
    Gross margin
    $14,700,500
    Selling and administrative expenses
    $11,466,135
    Earnings before interest and income tax
    $ 3,234,365
    Interest expense
    $
    795,000
    Earnings before income tax
    $ 2,439,365
    Income tax expense
    $
    853,778
    Net income
    $ 1,585,587
    Earnings per share*
    $
    3.75
    *Privately owned business corporations do not have to report earnings per share; publicly owned corporations are required to disclose this key ratio in their income statements.
    FIGURE 4.1 Income statement for the year just ended.
    income statements is a barrier to many readers. The balance sheet (or statement of financial condition) ranks