Financial Reporting

Written by Patricia Tunstall
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In the booming investment times of the 1920s, companies often promised instant wealth without revealing any information about their operations or financial conditions. The devastating crash of the stock market led to reform legislation. The Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act) laid out requirements for "full disclosure" of all "material facts" that would aid informed financial analysis by investors.

More recent legislation, and the accounting standards embodied in the generally accepted accounting principles (GAAP), use "transparency" as the touchstone of financial reporting by businesses. GAAP aims for consistency among any reporting companies. Consequently, accounting terms and systems should be readily understandable by business professionals. Financial reports should have full disclosure of the financial condition of the business.

Requirements for Financial Reporting

Unless an organization is exempt from financial reporting requirements, it must submit an annual financial report. This report consists of two broad sections: financial statements and disclosures. The financial statements have three components: the income statement, balance sheet, and cash flow statement.

Disclosure is made up of footnotes of information that has to be added, and explanations of how the reporting information was grouped. These are not just research footnotes. They introduce information that is an essential part of the report. In addition, anyone with any personal connection to the business, such as, a shareholder, should read the audit by the Certified Public Accountant (CPA), because this contains the CPA's judgment about the fairness of the company's accounting and the financial reporting.

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