External financial reporting
External financial reporting is communication of accounting information usually in the form of financial statements. The purpose of financial statements is to cater for the needs of such diverse users of accounting information in order to assist them in making sound financial decisions.
The external financial statements of a U.S. corporation should consist of a complete set of the following:
- Income statement (statement of earnings, statement of operations)
- Statement of comprehensive income
- Balance sheet (statement of financial position)
- Statement of cash flows (cash flow statement)
- Statement of stockholders’ equity (statement of shareholders’ equity, statement of equity)
- Notes to the financial statements
These financial statements become “external” when they are distributed to people and organizations not involved in the corporation’s operations. Some examples of external users are current investors and lenders, potential investors and lenders, financial analysts, certain government agencies, credit rating organizations, certain customers and suppliers, and others.
Since the external financial statements are likely to be compared to those of other corporations (and to previously issued financial statements), it is imperative that standardized rules be followed. In the U.S. these common rules are known as generally accepted accounting principles (GAAP), which are established by the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC).