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Financial Acumen for Non-Financial

Overview of Financial Reporting

Richard A. Lambert, Professor of Accounting


Definition of Accounting

• Accounting is a system for recording information about business

transactions and events
• To provide summary statements of a company's financial position and
performance to users who require such information
• Three sets of books
• Financial accounting
• Standardized reports for external stakeholders
• Tax accounting
• IRS rules for computing taxes payable
• Managerial accounting
• Custom reports for internal decision making

Financial Reporting Requirements

• Each country has its own financial reporting requirements

• In the U.S., The Securities and Exchange Commission (SEC) requires
periodic financial statement filings:
• 10 – K: Annual report (within 60 days for big firms)
• 10 – Q: Quarterly report (within 40 days for big firms)
• 8 – K: Current report (material events)
• Proxy, registration, and insider trading statements
• In other countries, firms file semi-annual reports instead of quarterly reports
• Firms supplement filings with voluntary disclosure
• Conference calls, press releases, forecasts, presentations at
brokerage conferences

Who Makes the Accounting Rules?

• Generally Accepted Accounting Principles (GAAP) are established by:

• U.S. Congress, but they delegate to:
• The SEC, but they delegate to:
• Financial Accounting Standards Board (FASB)
• International Financial Reporting Standards (IFRS) are required in over
100 countries, including the EU
• The two sets of rules are increasingly similar, but are not the same

Financial Statements Provide Information

About Firms’ Economic Activities

Raise Produce Collect Distribute

Capital From Goods and From Funds to
Investors Services Customers Investors

Reinvest in the Firm


More Timely Information Requires More Estimation

• Accounting systems slice the firm’s life into arbitrary periods (quarters and
• This allows for the generation of more timely information
• But many activities and decisions made to date aren’t done – they still
have implications for future cash flows

Annual Report Contents

• Discussion of
• Firm’s strategy, products, competitive environment
• Financial statistics
• Management discussion and analysis (MD&A)
• Financial statements
• Footnotes
• These explain the accounting procedures used by the firm and discuss
various assumptions regarding how the numbers were calculated

What are the Required Financial Statements?

• Balance Sheet
• Financial position (listing of resources & obligations) on a specific date
• Assets = Liabilities + Stockholders’ Equity
• Income Statement
• Result of operations over a period of time
• Net income = Revenues – Expenses
• Statement of Cash Flows
• Sources and uses of cash during a period of time
• Operating, Investing, and Financing Activities
• Statement of Stockholders’ Equity
• Change in stockholders’ equity over a period of time
Role of Financial Reporting
Other Factors (FASB,SEC,IRS,

Rules & Concepts

Financial Statements
Management’s Economic Events Management’s (Balance Sheet,
Strategy Decisions (Cash & Noncash) Accounting Choices Income Statement,
Cash Flow)
Other Other
Communications Shape
Incentives Communications

Resources Board of Directors – External Decision Makers

(Capital, Labor, etc) Governance (Capital markets, product
and Oversight markets, labor markets)

Provide Resources