Principles of Managerial Finance

42 PART 1 Introduction to Managerial Finance

generally accepted
accounting principles (GAAP)
The practice and procedure
guidelines used to prepare and
maintain financial records and
reports; authorized by the
Financial Accounting Standards
Board (FASB).

Financial Accounting
Standards Board (FASB)
The accounting profession’s
rule-setting body, which
authorizes generally accepted
accounting principles (GAAP).

Securities and Exchange
Commission (SEC)
The federal regulatory body that
governs the sale and listing of
securities.

stockholders’ report
Annual report that publicly
owned corporations must provide
to stockholders; it summarizes
and documents the firm’s
financial activities during the
past year.

letter to stockholders
Typically, the first element of the
annual stockholders’ report and
the primary communication from
management.

income statement
Provides a financial summary of
the firm’s operating results
during a specified period.

1. Although the Securities and Exchange Commission (SEC) does not have an official definition of publicly owned,
   these financial measures mark the cutoff point it uses to require informational reporting, regardless of whether the
   firm publicly sells its securities. Firms that do not meet these requirements are commonly called “closely owned”
   firms.


2. Whereas these statement titles are consistently used throughout this text, it is important to recognize that in prac-
   tice, companies frequently use different titles. For example, General Electric uses “Statement of Earnings” rather
   than “Income Statement” and “Statement of Financial Position” rather than “Balance Sheet.” Bristol Myers Squibb
   uses “Statement of Earnings and Retained Earnings” rather than “Income Statement.” Pfizer uses “Statement of
   Shareholders’ Equity” rather than “Statement of Retained Earnings.”

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2.1 The Stockholders’ Report

Every corporation has many and varied uses for the standardized records and

reports of its financial activities. Periodically, reports must be prepared for regu-

lators, creditors (lenders), owners, and management. The guidelines used to pre-

pare and maintain financial records and reports are known as generally accepted

accounting principles (GAAP).These accounting practices and procedures are

authorized by the accounting profession’s rule-setting body, the Financial

Accounting Standards Board (FASB).

Publicly owned corporationswith more than $5 million in assets and 500 or

more stockholders^1 are required by the Securities and Exchange Commission

(SEC)—the federal regulatory body that governs the sale and listing of securi-

ties—to provide their stockholders with an annual stockholders’ report.The

annual report summarizes and documents the firm’s financial activities during the

past year. It begins with a letter to the stockholders from the firm’s president

and/or chairman of the board.

The Letter to Stockholders

Theletter to stockholdersis the primary communication from management. It

describes the events that are considered to have had the greatest impact on the

firm during the year. It also generally discusses management philosophy, strate-

gies, and actions, as well as plans for the coming year. Links at this book’s

Web site (www.aw.com/gitman) will take you to some representative letters to

stockholders.

The Four Key Financial Statements

The four key financial statements required by the SEC for reporting to sharehold-

ers are (1) the income statement, (2) the balance sheet, (3) the statement of

retained earnings, and (4) the statement of cash flows.^2 The financial statements

from the 2003 stockholders’ report of Bartlett Company, a manufacturer of

metal fasteners, are presented and briefly discussed.

Income Statement

Theincome statementprovides a financial summary of the firm’s operating results

during a specified period. Most common are income statements covering a 1-year

period ending at a specified date, ordinarily December 31 of the calendar year.