The financial statement
Financial statements are the backbone of a complete financial report. In fact, a financial report is not complete if the three primary financial statements are not included, even though a financial report is much more than just those statements. Financial reports also require disclosures to provide additional information as it relates to a company’s business activity and financial health, which is why any comprehensive and ethical financial report must include, not only the primary financial statements, but disclosures as well and we will talk a little more about disclosures as we continue through this article.
The chief executive of a business – usually the chief financial officer CEO in a publicly held corporation – is primarily responsibe for making sure that the financial statements have been prepared according to generally accepted accounting principles (GAAP) and that the financial report provides adequate disclosures. S/he works with the CEO or controller of the business to see to it that the financial report meets a standard of acceptably adequate disclosures.
Disclosure methods
Acceptable disclosure methods:
- Footnotes – Provide information about the basic figures. Nearly all financial statements require footnotes to provide additional information for several of the account balances in the financial statements;
- Supplementary – This pertains to financial schedules and tables that provide more details than can be included in the body of the financial statement;
- Voluntary – This information may be required if the business is a publicly traded corporation and subject to federal regulations as it pertains to financial reporting to its stockholders, but it is not strictly required, legally, or according to GAAP.
Disclosures required by some governing boards and agencies include:
- FASB standards – The financial Accounting Standards Board (FASB) has designated many standards. Its dictate regarding disclosure of the effects of stock options is one such standard;
- SEC mandates – The Securities and Exchange Commission (SEC) mandates disclosure of a broad range of information for publicly held companies;
- IASB standards – International businesses have to abide by disclosure standards adopted by the International Accounting Standards Board (IASB).
Earnings Per Share
Publicly owned companies must report earnings per share (EPS) below the net income line in their income statements. This is mandated by generally accepted accounting practices (GAAP), because the EPS gives investors a means of determining the amount a particular business earned on its stock share investments. In other words, EPS tells investors how much net income the business earned for each stock share they own.
The EPS is calculated by dividing net income by the total number of capital stock share, and while it may appear to be a very simple and straight forward calculation, this task cannot be left to a company’s management; it must be done by accounting specialists based its importance to the stockholders who want the net income of the business to be communicated to them on a per share basis so they can compare it with the market price of their shares.
Necessity to report
EPS reporting is not a requirement that private businesses have to meet because stockholders focus more on the total net income of such companies instead of any shares of stock, because since these companies are not subjected to the SEC rules and regulations or subject to GAAP standards.
Publicly-held companies actually report two EPS figures, unless they have what is known as a simple capital structure. Most publicly-held companies, though, have complex capital structures and have to report two EPS figures, one of which is known as the basic EPS while the other is called the diluted EPS. Basic EPS is specific to the number of stock shares that are outstanding, and Diluted Earnings are based on shares that are outstanding as well as shares that may be issued at some future date in the form of stock options.
Obviously this is a complicated process and, as mentioned earlier, an accounting specialist must be assigned the task of adjusting the EPS formula for any number of occurrences or changes in the business. A company might issue additional stock shares during the year and buy back some of its own shares; or it may issue several classes of stock which will cause net income to be divided into two or more pools – one pool for each class of stock. A merger, acquisition or divestiture will also impact the formula for an EPS report.
SPONSORED As an Amazon Associate I earn referral fees from qualifying purchases.