Financial Statements and Financial Reporting

Accounting is the universal language of business.

One noted economist and politi cian indicated that the single-most important innovation shaping capital markets was the development of sound accounting principles. The essential characteris tics of accounting are: (1) the identification, measurement, and communication of financial information about (2) economic entities to (3) interested parties. Financial accounting is the process that culminates in the preparation of financial reports. on the enterprise for use by both internal and external parties. Users of these financial reports include investors, creditors, managers, unions, and government agencies. In contrast, managerial accounting is the process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, control, and evaluate a company's operations.

Financial statements are the principal means through which a company commu nicates its financial information to those outside it. These statements provide a com pany's history quantified in money terms. The financial statements most frequently provided are (1) the statement of financial position, (2) the income statement or statement of comprehensive income, (3) the statement of cash flows, and (4) the state ment of changes in equity. Note disclosures are an integral part of each financial statement.

Some financial information is better provided, or can be provided only, by means of financial reporting other than formal financial statements. Examples include the president's letter or supplementary schedules in the corporate annual report, prospec tuses, reports filed with government agencies, news releases, management's forecasts, and social or environmental impact statements. Companies may need to provide such information because of authoritative pronouncements, regulatory rule, or custom. Or they may supply it because management wishes to disclose it voluntarily.

In this textbook, we focus on the development of two types of financial information:

(1) the basic financial statements and (2) related disclosures.