Definition and Elements of Financial Reporting

Stories relating to chapter I of Financial Reporting in Government
By Dr. John Sacco , George Mason University
Revised Monday, October 13, 1997

Two friends decided they wanted to go into business printing t-shirts. To start the business they really needed a loan and decided to go the bank where one of the friends had a checking account. The friends were anxious because
- they had never prepared any financial reports ,
- they really didn't know much about each others financial history,
- they didn't truly know the bank personnel and how the bank personnel would react to their request, and
- they didn't know how closely anyone would check on them or maybe even audit their records.
Actually, their anxieties were not different from anyone who has to relate financial information to an outsider or external users . Once they scheduled a formal meeting with the loan officer, they had to tell about their income, the sources of their income, and the steadiness of their income. They also had to list how they spent their money, particularly any major items and items that were not fully paid. The loan officer was getting at how financially successful they were in covering their expenses with good, steady income. The loan officer also wanted to know about their assets, especially how much cash or other liquid assets they had. Not missed in this discussion were any loans or debts they had and a comparison of assets with liabilities. Here the loan officials was trying to get at their financial health or conditions . The loan person also asked questions that seemed to get at whether either may have or are now not being as accurate as they should be, doing a type of audit . Finally, did they have any rich relatives who might help too? As it turned out the friends learned a good deal about each others financial success, conditions, and habits. So too did the loan officer. For the most part, their finances were in good shape except one occasionally relied too heavily on credit cards to pay an outstanding loan and did not have a good plan for solving the problem. This behavior is not untypical when people try to satisfy too many current needs with borrowing. The friends actually decided against going into business but learned a good deal about the impact of the information in their " financial report" to the loan officer and how that information helped both the friends and the loan officer make financial decisions.
The second is a story of two people who were given a CAFR at the end of a tour of a new government building. The first person looked at it, was overwhelmed with its detail, and threw it away. The second person simply thought she would be different and tried to find out more about this CAFR. One evening, she just happened to find a cable station carrying a meeting of the government that distributed the CAFR. Although she only watched for a short time she found out that the building she toured was being leased by the government and that the government was obligated to pay the lease for ten years. Someone at the meeting made reference to the fact that it was all in the CAFR. She then paged through the CAFR and after some searching found a section on leases. The amount seems pretty high to her based on her experience with office leases. The next time she voted she used this information in deciding how to vote, although it was not the major factor. She thought that even a little information from a complex document can be helpful because there are many other complementary sources of information in one's daily life. She even complained to friend at work about how difficult it is to understand government financial reports . Her friend said rhetorically, do they really want you to understand what's going on in government? She thought about that statement but couldn't decide one way or the other since she did get some benefit from her effort. So she had some faith but she was skeptical too.
For both people the CAFR was originally a cacophony of sounds. But for the person who even took a passing interest some but certainly not all the sounds made sense. In fact cacophony is a good way to describe a CAFR for a first time viewer. All those numbers and words jump out without much if any meaning.

See Also: homework , project elements , course readings , the glossary , exercises and demonstrations , and a summary