The primary means of communicating the financial effects of organizational activities and transactions of a company to outsiders is the financial reporting system. This reporting system includes communicating financial information through annual financial statements, as well as through reports filed with the Securities and Exchange Commission, voluntary forecasts, and other financial and nonfinancial releases. Financial statements are the main source of financial information conveyed to parties external to the company. The full set of primary financial statements consists of a balance sheet, income statement, and statement of cash flows. External financial statements have a general purpose and are designed to meet the needs of investors, creditors, and other users of the external reports. They are historical in that they communicate activities and events that have already occurred. Financial statements are prepared on an accrual basis; they measure the impact of events and transactions when they occur and not simply when the cash consequences of such events and transactions are realized. Financial statements are useful in evaluating an enterprise's profitability, liquidity, and long-term solvency and equity structure. An analysis is conducted from the perspective of external users of financial statements and it relies on the annual report of a corporation and other publicly available information. Management, of course, also has access to extensive internal financial data, and their concerns extend to subdivisions of the enterprise, such as the performance of subsidiaries, divisions, departments, and operating functions. External reports are intended primarily for stockholders, creditors, directors, and regulators such as the SEC. Although externally reported information is also useful to corporate management at the highest level, it is far too aggregate to be useful for decision making by lower levels of management. And e...
