ABSTRACT
Financial reporting is the face of accounting that many managers and most outsiders see. In the United States, quarterly results are very closely watched
by executives, financial analysts and others. Annual results are perhaps subject to less scrutiny and in many ways are simply viewed as an adjunct to fourth-quarter results. Many companies prepare, but do not publicly release, results on a monthly basis or even more frequently. As has been widely reported in recent years, the performance and future prospects of a company are measured not only by quarterly results, but by the relation of these results to the expectations of financial analysts. Certainly growth in revenues and in profits are important, but there have been numerous instances of companies that reported both growth in revenues and in profits compared to the same quarter of the previous year, yet failed to meet analysts’ expectations for earnings per share and had their stock price decrease dramatically as a result. Financial reporting, then, not only provides management and others with a summary of the company’s performance over a period of time or a statement of its financial condition at a point in time. It also plays a role in determining whether investors will bid the stock price up or down and whether the top managers will be judged to have succeeded or failed in their management of the company.4 Since stock ownership, through options or through direct ownership, has become a major factor, if not the key component, in the personal wealth of many top managers, the stock price has also become a more and more important criterion for judging personal success as well as corporate performance. In the government sector, accounting has the same basic purpose that it does in the private sector, but many of the rules and procedures are different. Further, the impact of financial reports on the top manager’s personal financial position is much less direct than in the corporate sector. In this chapter, we will view accounting and financial reporting from two perspectives. The first is that of financial reporting, as embodied mostly in the three key financial statements: the balance sheet, the income statement and the cash flow statement. The second is the broader perspective of the accounting process, which involves the work of many individuals throughout an organization. This second perspective in many ways feeds the financial reporting function. The summary numbers presented on the three major statements are constructed from accounting for detailed transactions in many areas of the company. For instance, WalMart’s revenue for fiscal 2010 was $422 billion. This appears as a single line on the income statement. However, to arrive at that number the company must record and summarize all the sales at all the checkout stands in all the stores that WalMart operates, in addition to the charges made for online purchases. Further, it must adjust the total amount of sales to reflect returns to the stores and credited amounts for these returns. The number of individual transactions that comprise the total revenue number is staggering.5 Yet, each of them is a part of the accounting and financial reporting process.
