Companies need to file several financial reports in different periods with the Securities and Exchange Commission.

  • 14A Proxy Statement - Given before the annual shareholders’ meeting, this document outlines the proposed actions taken to a shareholder vote, executive compensation, company ownership, and performance against rivals.

  • 10-Q Quarterly Report - The report, normally submitted within 45 days of fiscal quarter, contains the unaudited financial statement and management discussion and analysis.

  • 10-K Annual Report - This paperwork includes MD&A, schedules, and audited financial statements. It is provided within 90 days of fiscal year end.

Those who prepare various financial reports adhere to the generally accepted accounting principles (GAAP), a set of accounting principles, procedures, and standards for creating financial statements. GAAP begins with a conceptual framework encompassing a bunch of principles including materiality and verifiability. In essence, the structure aims to help in making sound decisions by providing reliable, relevant, and useful details.

The framework is general; hence, the necessity to interpret and reinterpret the report due to current and incoming business dealings. But some things are unavoidable, given the complexity of accounting standards.

  • Relevance and reliability are not the same. Take this: a stated transaction is reliable if the posted figure is accurate and unbiased. A transaction is relevant if an investor seeks it. We can ask for both but we cannot get them both. In terms of derivatives, relevance prevails over reliability. Derivatives in general can be complicated and difficult to appraise. But the speculative ones raise risk. It is imperative for firms to declare derivatives at fair value on the balance sheet. The value, which can be precise or not, is more appropriate than historical costs.

  • The reporting period is the other reason for the intricateness of rules. Accrual accounting is the process of matching revenues to expenses at the time in which the dealing takes place, regardless of cash flows. Another thing: depreciation is a manner of disbursing the purchase price to estimate profits every year.

How does the system work? We will find out in the next tutorial.