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How to Read a Financial Report: Wringing Vital Signs Out of the Numbers by John A. Tracy

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19
ACCOUNTING AND FINANCIAL
REPORTING STANDARDS
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152 Accounting and fi nancial reporting standards
Millions of persons depend on fi nancial reports for vital informa-
tion about businesses. This sweeping congregation of fi nancial
report users includes bankers deciding whether to make loans to
businesses; investors deciding whether to buy, hold, or sell stocks
and debt securities of public corporations; buyers and sellers of
private businesses deciding on the value of the company; own-
ers of closely held businesses evaluating how their ventures are
doing; suppliers deciding whether to sell to businesses on credit;
and pension fund managers carrying out their fi duciary respon-
sibility that requires due diligence in managing other people s
money.
And let s not forget business managers themselves. Managers
are the fi rst and most immediate users of accounting informa-
tion and fi nancial statements. Managers depend on accounting
reports to track their profi t (or loss) performance. Managers
need balance sheet and cash fl ow information to keep their fi nan-
cial condition under control, to spot any solvency problems that
may be developing, and to plan for the capital requirements of
the business. Managing the fi nancial affairs of a business would
be impossible without fi nancial statements.
It goes without saying that fi nancial statements and the
accompanying disclosures should meet the information needs of
users. Different readers focus on different information in fi nan-
cial reports. Financial statement users are generally interested in
four basic fi nancial aspects of a business:
1. Its sales revenue and profi t (or loss) performance.
2. Its nancial condition consisting of assets and liabilities, and
in particular the solvency prospects of the company, which
refers to the ability of the business to pay its liabilities on
time and stay out of fi nancial trouble.
3. Its capitalization (ownership) structure , which refers to the one
or more classes of capital stock shares issued by the com-
pany, whether any debt of the company can be converted
into capital stock, the number of stock options given to
managers, and any other claims that directly or indirectly
participate in the profi t of the business.
4. Its cash fl ow from profi t - making (operating) activities for the
period, its cash distributions from profi t to shareowners
during the period, and its other sources and uses of cash
ow during the period.
These four constitute the hard core of information that most
investors and lenders look for in the fi nancial statements and
footnotes of a business.
This chapter discusses the standards that govern account-
ing methods and disclosure in fi nancial reports by businesses.
All for - profi t business entities must abide by these rules of the
game. (Not - for - profi t organizations and governmental entities
Importance of Financial Reports
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