3. Generally Accepted Accounting Principles (GAAP) People and organizations make decisions based on financial information prepared by accountants. That is why it is important for people and organizations to understand the ways in which accounting information is measured. To ensure consistency, rules are established that business people can use to make sure they are comparing oranges to oranges. For example, assume a store sells goods. Should the store's accountant record the sale at the moment the goods are shipped (accrual accounting) or at the timecash for these goods is received (cash accounting)? Whether the store owner applies accrual or cash accounting is not important to interested parties, aslong as the owner follows a rule requiring him to disclose the chosen accounting method for the reporting purposes. Accounting rules such as these are grouped together and calledGenerally Accepted Accounting Principles(GAAP). Generally Accepted Accounting Principles (GAAP)are common standards that guide accountants in reporting economic events. The Financial Accounting Standards Board (FASB) regularly issues Statements of Financial Accounting Standards (SFAS) that comprise a large portion of GAAP. You can find more information about SFAS, their issuance processand current projects on FASB's website. In 2009, all SFAS statements and other pronouncements were included in the Accounting Standards Codification (ASC), which is the single source of authoritative U.S. accounting and reporting standards, other than guidance issued by the Securities and Exchange Commission (SEC). Other organizations playing a significant role in regulating the accounting profession are the Securities and Exchange Commissionand the Public Company Accounting Oversight Board (PCAOB). The SEC and PCAOB mostly regulate public companies, while the FASB establishes standards for private companies. 4. Financial reporting and financial statements Businesses communicate accounting information to the public through a process known asfinancial reporting. Financial reportingis the process through which companies communicate information to the public. The central means of external financial reporting is a set of financial statements. There are four general-purpose financial statements: Income Statement Statement of Changes in Equity Balance Sheet Statement of Cash Flows Anincome statementpresents revenues and expenses and resulting net income or net loss for a period of time. An income statement is also called a Statement of Operations, an Earnings Statement, or a Profit and Loss Statement (P/L). Astatement of changes in equityshows all changes in owners' equity for a period of time. This statement is also calledan Owners' Equity Statement. Abalance sheetpresents assets, liabilities and owners' equity on a specific date. A balance sheet isalso called a Statement of Financial Position. Acash flow statementsummarizes information about cash outflows (payments) and inflows (receipts). This statementmay also include certain information not related to actual cash flows. Notes to the financial statements are another important aspect of reporting. Notes can be found in most financial statements and are required to be included in the financial statements of publicly traded companies. Notes include, among other things, additional information about the financial condition and performance of a company. The information presented in the notes may differ greatly from one company to another.