Reading Financial Reports For Dummies
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Every quarter, corporations must report financial results to the SEC (which has primary responsibility for the U.S. government's oversight of public corporations) on Form 10-Q. The 10-Q isn't a blank form that needs to be filled in. Instead, the SEC provides general instructions for the information that must be included and the format in which it must be presented. The 10-Q includes two parts.

Financial information

The financial information required for Part I of Form 10-Q isn't much different from the info required for the annual reports. Four items are required:

  • Item 1 — Financial statements: Included in this section are the balance sheet, income statement, and statement of cash flows.

  • Item 2 — Management's discussion and analysis of financial condition and results of operations: This section includes a discussion and analysis by management of the company's liquidity, resources, and operations, its financial condition, and any changes that occurred during the quarter.

  • Item 3 — Quantitative and qualitative disclosures about market risk: This section includes discussion about external conditions that impact the company's market, including the impact of inflation, economic conditions that could impact revenue, and competitive forces that may impact the company's future results.

  • Item 4 — Controls and procedures: This section requires management to disclose the controls and procedures the company has in place to protect its assets and the accuracy of its financial reports.

Other critical matters

Companies report other important corporation matters that don't fall under the topic of financial results in Part II of the 10-Q. This section contains several possible items, but companies need to include only the items relevant to the particular quarter being reported. Following are the items in Part II:

  • Item 1 — Legal proceedings: Events involving legal proceedings must be reported only during the quarter in which they first became material and in any future quarters when information related to material developments is available. Material developments are proceedings that may have a significant impact on a company's finances.

  • Item 1A –Risk factors: This section reviews the risks disclosed related to a company's business, financial condition, and cash flows, as well as results of operations that may be materially adversely affected by any of these risks. The trading price of the company's common stock may decline due to these risks.

  • Item 2 — Unregistered sales of equity securities and use of proceeds: The company must report all equity securities sold by the registrant during the period covered by the report that were not registered under the Securities Act. Information about repurchases of securities also must be included.

  • Item 3 — Defaults upon senior securities: If a company defaults on its payment of principal or interest on company debt and the default isn't cured within 30 days, the company must report it. The only type of default that doesn't need to be reported is one between a parent company and one of its subsidiaries.

  • Item 4 — Mine safety disclosures: If applicable, information about mine safety violations or other regulatory matters is reported here.

  • Item 5 — Other information: This item is a catchall for any issue that hasn't been previously reported on Form 8-K but needs to be reported. A company doesn't have to file an 8-K for an issue reported on a Form 10-Q.

  • Item 6 — Exhibits and reports on Form 8-K: Any compliance reports filed during the quarter must be attached as an exhibit (additional pages that provide this information) on the 10-Q.

About This Article

This article is from the book:

About the book author:

Lita Epstein, who earned her MBA from Emory University’s Goizueta Business School, enjoys helping people develop good financial, investing and tax-planning skills.
While getting her MBA, Lita worked as a teaching assistant for the financial accounting department and ran the accounting lab. After completing her MBA, she managed finances for a small nonprofit organization and for the facilities management section of a large medical clinic.
She designs and teaches online courses on topics such as investing for retirement, getting ready for tax time and finance and investing for women. She’s written over 20 books including Reading Financial Reports For Dummies and Trading For Dummies.
Lita was the content director for a financial services Web site, MostChoice.com, and managed the Web site, Investing for Women. As a Congressional press secretary, Lita gained firsthand knowledge about how to work within and around the Federal bureaucracy, which gives her great insight into how government programs work. In the past, Lita has been a daily newspaper reporter, magazine editor, and fundraiser for the international activities of former President Jimmy Carter through The Carter Center.

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