Accounting For Dummies®, 4th Edition

13.1. Knowing the Rules of the Game

When you invest money in a business venture or lend money to a business, you receive regular financial reports from the business. The basic premise of financial reporting is accountability — to inform the sources of a business's ownership and debt capital about the financial performance and condition of the business. Brief financial reports are sent to owners and lenders quarterly (every three months). A full and comprehensive financial report is sent annually. This chapter focuses on the annual financial report.

Public companies make their financial reports available to the public at large; they do not limit distribution only to their present shareowners and lenders. For instance, I don't happen to own any stock shares of Caterpillar. So, how did I get its annual financial report? I simply went to Cat's Web site. In contrast, private companies generally keep their financial reports private — they distribute their financial reports only to their shareowners and lenders. Even if you were a close friend of the president of a private business, I doubt that the president would let you see a copy of its latest financial report. You may as well ask to see the president's latest individual income tax return. (You're not going to see it either.)

NOTE

There are written rules for financial reports, and there are unwritten rules. The main written rules in the United States are called generally accepted accounting principles (GAAP). The unwritten rules ...