The Comprehensive Guide on How to Read a Financial Report: Wringing Vital Signs Out of the Numbers, + Website

CHAPTER 22

FINANCIAL STATEMENT RATIOS—CALCULATING AND UNDERSTANDING

Financial Reporting Ground Rules

The main purpose of external financial reporting is to provide up-to-date financial information from a business to its investors and lenders. The investors and lenders are its sources of capital and they 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 and its other creditors. When they read financial reports, they should keep in mind that these communications are 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 5,000 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 some 12,000 foreign businesses are traded in stock markets around the world. Many countries, including the United States, have been attempting to develop a set of international financial reporting and accounting standards ...