What is financial reporting?

Definition of Financial Reporting

Financial reporting includes all of a company's communication of financial information to
people outside of the company.

Examples of Financial Reporting

Financial reporting includes the following:

 External financial statements (income statement, statement of comprehensive

income, balance sheet, statement of cash flows, and statement of stockholders' equity)
 The notes to the financial statements
 Press releases and conference calls regarding quarterly earnings and related information
 Quarterly and annual reports to stockholders
 Financial information posted on a corporation's website
 Financial reports to governmental agencies including quarterly and annual reports to the
Securities and Exchange Commission (SEC)
 Prospectuses pertaining to the issuance of common stock and other securities

Financial Analysis
When computing financial ratios and when doing other financial statement analysis always keep
in mind that the financial statements reflect the accounting principles. This means assets are
generally not reported at their current value. It is also likely that many brand names and unique
product lines will not be included among the assets reported on the balance sheet, even though
they may be the most valuable of all the items owned by a company.
These examples are signals that financial ratios and financial statement analysis have limitations.
It is also important to realize that an impressive financial ratio in one industry might be viewed as
less than impressive in a different industry.

Our explanation of financial ratios and financial statement analysis is organized as follows:

 Balance Sheet
o General discussion
o Common-size balance sheet
o Financial ratios based on the balance sheet
 Income Statement
o General discussion
o Common-size income statement
o Financial ratios based on the income statement
 Statement of Cash Flows

What is a cost variance?

Definition of Cost Variance
Generally a cost variance is the difference between the actual amount of a cost and its
budgeted or planned amount. For example, if a company had actual repairs expense of $950
for May but the budgeted amount was $800, the company had a cost variance of $150. When
the actual cost is more than the budgeted amount, the cost variance is said to be unfavorable.
When an actual cost is less than the budgeted amount, the cost variance is said to
be favorable.

Cost Variances in Standard Costing Systems

Cost variances are a key part of the standard costing system used by some manufacturers. In
such a system, the cost variances direct attention to the difference between 1) the standard,
predetermined and expected costs of the good output, and 2) the actual manufacturing costs
incurred. These cost variances send a signal to management that the company is experiencing
actual costs that are different from the company's plan.
Standard costing systems report a minimum of two cost variances for each of the following
manufacturing costs:

 Direct materials
 Direct labor
 Manufacturing overhead

What is budgeting?
Definition of Budgeting
Budgeting is the process of preparing detailed projections of future amounts. Companies
often engage in two types of budgeting:

 Operational budgeting, and

 Capital budgeting
Examples of Operational Budgeting
In a business, the budgeting for operations will include preparing the following projections
for the next accounting year:
 Amounts for sales
 Amounts for producing goods
 Amounts for each department's expenses
 Summarizing the above budgets into a master budget or profit plan
 Cash receipts and disbursements for a cash budget
 Projected financial statements also referred to as pro-forma financial statements
Once prepared and approved, the budgeted amounts are used as a guide or road map in
controlling the next year's business activities.

Example of Capital Budgeting

Capital budgeting involves future projects which overlap several or many future accounting
periods. Capital budgeting usually means listing each project along with its cash outlays and
expected cash inflows for each year. The amounts should be discounted to their present
values and also ranked by priority and profitability.

Once prepared, the capital budget provides a guide for investing in future fixed assets as well
as arranging for the financing of the projects.