Management’s Role in Preparing Financial Reports
The management (CEO and financial officers) of a business must make sure that the financial statements and disclosures are adequate according to financial reporting standards, and that all the disclosure elements are truthful but, at the same time, not damaging to the business.
Whether a business is a small private company or a large public corporation, its annual financial report consists of
The three basic financial statements: income statement, balance sheet, and statement of cash flows.
A statement of changes in owners’ equity (if needed). This statement reports information regarding changes in owners’ equity accounts during the year that is not included in its three primary financial statements.
And more. In deciding what “more” means, the business’s CEO and top lieutenants play an essential role — which they (and outside investors and lenders) should understand.
The CEO does certain critical things before a financial report is released to the outside world:
Confers with the company’s CFO and controller (chief accountant) to make sure that the latest accounting and financial reporting standards and requirements have been applied in its financial report.
The president of a smaller private company may have to consult with a CPA on these matters. Recent years have shown a high degree of flux in accounting and financial reporting standards and requirements.
A business and its auditors cannot simply assume that the accounting methods and financial reporting practices that have been used for many years are still correct and adequate. A business must check carefully whether it is in full compliance with current accounting standards and financial reporting requirements.
Carefully reviews the disclosures in the financial report.
This disclosure review can be compared with the notion of due diligence, which is done to make certain that all relevant information is collected, that the information is accurate and reliable, and that all relevant requirements and regulations are being complied with. This step is especially important for public corporations whose securities (stock shares and debt instruments) are traded on securities exchanges.
Considers whether the financial statement numbers need touching up.
The idea here is to smooth the jagged edges off the company’s year-to-year profit gyrations or to improve the business’s short-term solvency picture. The CEO should approve adjusting the financial statements in order to make them jibe better with the normal circumstances of the business.
The manager must strike a balance between the interests of the business itself, and the interests of the owners (investors) and creditors of the business. Financial reports may have some hype, and managers may choose to put as much positive spin on bad news as possible without making deceitful and deliberately misleading comments.
Accounting Glossary
accounting equation
The equation Assets = Liabilities + Equity, which demonstrates the two-sided nature of accounting and is useful for explaining the concept of double-entry accounting (or double-entry bookkeeping).
Accounting Glossary
accounting period
The time period for which financial information is being tracked in a business, such as monthly, quarterly, or annually.
Accounting Glossary
accounts receivable
An account that records the amounts that customers owe to a business.
Accounting Glossary
adjusting entry
A correction made to a bookkeeping account that adjusts for accounting errors or other necessary changes at the end of the accounting period.
Accounting Glossary
cash flows
Used to describe the source or sources of cash or how cash is used.
Accounting Glossary
Chart of Accounts
A list of all the accounts used by a business, including what types of transactions go into each account.
Accounting Glossary
debit
An accounting entry that increases an asset or expense account, and decreases a liability or income account.
Accounting Glossary
dividends
A portion of a company’s profits paid by share of common stock on a quarterly or annual basis.
Accounting Glossary
FASB
Financial Accounting Standards Board. FASB is the highest-ranking authority in the private (non-government) sector of the U.S. for making pronouncements on GAAP and for keeping accounting standards up-to-date.
Accounting Glossary
Federal Unemployment Tax
In the U.S., the fund that used to be known simply as Unemployment. Employers contribute to the fund, and states also collect taxes to fill their unemployment fund reserves. (The acronym FUTA means Federal Unemployment Tax Act.)
Accounting Glossary
fidelity bonds
A type of insurance — typically carried by employers for their employees — that helps guard against theft and reduce the risk of loss.
Accounting Glossary
FIFO
First-in, first-out. A method for costs of goods sold in which a business charges out product costs to cost of goods sold expense in the chronological order in which the goods were acquired.
Accounting Glossary
fungible
Describes a product that is interchangeable and virtually indistinguishable from another product.
Accounting Glossary
General Ledger
A summary of all of a business’s accounts and transactions.
Accounting Glossary
IASB
International Accounting Standards Board. The IASB (based in London) is the main authoritative accounting standards setter outside the U.S.
Accounting Glossary
Journals
The location in which bookkeepers keep records (in chronological order) of daily company transactions.
Accounting Glossary
LIFO
Last-in, first-out. A method for costs of goods sold that selects the last item you purchased first, and then works backward until you have the total cost for the total number of units sold during the period.
Accounting Glossary
LLP
Limited liability partnership. A legal structure that state laws offer to qualified professionals in which all the partners have limited liability.
Accounting Glossary
PC
Professional corporation. A legal structure that state laws offer to qualified professionals who otherwise would have to operate as an unlimited partnership liability.
Accounting Glossary
petty cash
A cash account that businesses keep on hand for unexpected expenses.
Accounting Glossary
revenue
Monies that are collected in the process of selling a company’s goods and services.
Accounting Glossary
salvage value
The amount that an asset is worth after it has been fully depreciated.
Accounting Glossary
statement of cash flows
A financial statement that summarizes a business’s cash inflows and outflows during an accounting period.
Accounting Glossary
transactions
Economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.
Accounting Glossary
worker’s compensation insurance
A type of insurance carried by employers that covers its employees in case they are injured on the job.
