The Layout of Accounting Statements

Accounting statements in the United States are prepared according to generally accepted accounting principles (GAAP). GAAP includes the conventions, rules, and procedures that define how firms should maintain records and prepare financial reports.1 In the United States, these rules and procedures are based on guidelines issued by the Financial Accounting Standards Board (FASB). FASB is the U.S. accounting profession's rule-making organization.

Internationally, the set of generally accepted accounting principles varies from one country to another. In some cases U.S. GAAP is quite different from international accounting standards (IAS) used in some other countries. As a result, you cannot compare the information contained in the financial statements of two firms when the statements were prepared under different systems of GAAP until you first adjust for the differences.

Even under U.S. GAAP, it is possible for accounting numbers to distort economic reality. One of the tasks facing a good manager is to use accounting information effectively. Managers must know how accounting information can--and cannot--be used. This is a balancing act. They have to combine their knowledge of accounting with other sources of information to make sound business decisions.

Financial Statements

A firm's published annual report includes, at a minimum, an income statement, a balance sheet, a statement of cash flows, and accompanying notes.2 We review these statements, using a basic set of statements for OutBack SportWear, Inc., as an example.3 They are the "raw material" for a variety of techniques and procedures that managers and analysts use in financial statement analysis. But first, let us introduce some basic terms we will need.