Accounting Periods

A corporation is required to issue annual financial statements, but it is common for a corporation to prepare monthly financial statements for its management. Financial statements issued between the annual financial statements are known as interim financial statements. Interim financial statements could be prepared for periods such as one month, four weeks, three months, 13 weeks, eight months, eleven months, one year, etc.

Many corporations have accounting years that begin on January 1 and end on December 31. This one-year period of time (or time interval) is referred to as a calendar year. A calendar year corporation will have quarterly accounting periods that end on March 31, June 30, September 30, and December 31.

Some U.S. corporations have accounting years that end on a date other than December 31. For example, a corporation could have an accounting year that begins on July 1 and ends on the following June 30. Another corporation might have an accounting year that begins on October 1 and ends on September 30. These are known as fiscal years.

Some U.S. corporations have a fiscal year that is based on weeks instead of months. For example, some large U.S. retailers have fiscal years consisting of the 52 or 53 weeks ending on the Saturday nearest to January 31. Hence, their fiscal year could begin on a Sunday (such as February 3) and end 52 weeks later on a Saturday (such as February 1).

The benefit of having a fiscal year is that it will coincide with the business year. A retailer will have a fiscal year ending four or five weeks after the peak holiday sales of December so that its net sales and net income will reflect the merchandise that was sold in December but was returned in January.

Users of the Financial Statements

The financial statements issued by a U.S. corporation and distributed outside of the corporation could find their way into the hands of the following people and/or organizations:

• current stockholders
• current lenders
• financial analysts
• potential future investors
• potential future lenders
• current and future suppliers of goods or services
• certain customers
• government agencies
• labor unions
• competitors and others

The users often compare a corporation’s financial statements to those of 1) previous accounting periods, and 2) other companies. Therefore, for the financial statements to be useful they must consistently follow common reporting rules. In the U.S. these common rules are referred to as generally accepted accounting principles or GAAP or US GAAP. US GAAP includes basic underlying guidelines such as the historical cost principle, revenue recognition, going concern, full disclosure, industry practices, plus some very detailed reporting requirements for leases, pensions, investment securities, hedging activities, and other complex financial transactions. The task of researching and developing US GAAP is carried out by the non-government organization Financial Accounting Standards Board or FASB (pronounced “faz-bee”).

US GAAP requires that when the annual financial statements are distributed outside of the corporation they must include all five of the following financial statements (including the notes to the financial statements):

1. Income statement
2. Statement of comprehensive income
3. Balance sheet
4. Statement of stockholders’ equity
5. Statement of cash flows