How to Read a Financial Report, 9th Edition

17 FINANCIAL STATEMENT RATIOS AND ANALYSIS

Financial Reporting Ground Rules

The main purpose of external financial reporting is to provide up-to-date, complete, accurate, reliable, and timely financial information from a business to shareholders, investors, lenders, analysts, and the like. Investors and lenders are critical external parties as they represent potential sources of capital (debt and equity) and as such, have a right to and need for the information. Other parties are also interested in the financial affairs of a business—for example, its employees, other creditors, analysts (who provide independent assessments of a business), regulatory groups, and so on. When they read financial reports, they should keep in mind that these communications are primarily directed to the owner-investors of the business and its lenders. External financial reporting standards have been developed with this primary audience in mind.

According to estimates, there are about 3,600 publicly owned businesses in the United States. Their capital stock shares and other securities are traded in public markets. The dissemination of financial information by these companies is governed by federal law, which is enforced mainly by the Securities and Exchange Commission (SEC). The New York Stock Exchange, Nasdaq, and Internet securities markets also enforce rules and regulations over the communication of financial information by companies whose securities are traded on their markets.

Securities of foreign ...