Each year, every publicly traded company must provide the Securities Exchange Commission (SEC) with a 10k report. This report clarifies the company's operation and positions and allows the SEC to approve the company for continued listing on a public exchange.
Explanation of Business Activities
This section basically describes what the company does, where it operates, how it operates and how it makes its money. This is similar to a business purpose function of a business plan. It is the easiest part to report, and it does not change on a yearly basis unless the company makes drastic changes to its structure.
Financial statements are a part of the regular business cycle for most organizations, public and private. Financial statements can be used to know how the company has performed in comparison to last year or in comparison to its competitors. Financial statements also disclose liabilities, debts and other concerns the business may be dealing with on a strictly fiscal level. Financial statements must be prepared according to Generally Accepted Accounting Principles (GAAP).
If the company is facing a lawsuit or other known risk, this must be disclosed on a 10k. These risks will not automatically appear on a financial statement because they have not yet been incurred. In fact, GAAP rules dictate these should not be reported until they are incurred. However, the business owners may be well aware the next financial statement will likely include a loss, and it should be disclosed in this section.
There are some debts that will not be reflected on a financial statement because they are part of the operational schedule but not a signed debt note. Leases are the most common example of outstanding debts. If you own and operate an auto repair business located in a strip mall, you pay the strip mall rent each month. This is not a signed debt note, and it does not appear on a financial statement as a result. However, if you are unable to make this payment, you can go out of business just the same as if you were unable to make a financing payment on your equipment.
A business must assure the SEC it is following standard GAAP rules with its accounting. This is usually guaranteed through a statement from a Certified Public Accountant who prepared the 10k and financial statements. A private company owner can create a financial statement without the use of a certified accountant. A public company, though, is responsible to assure all reports are lawful and a certified account prepared the statements.
The Chief Executive Officer and Chief Financial Officer of a company must each sign a statement saying they have reviewed the books and they are accurate to their best knowledge. This protection is in place so an executive-level employee cannot pass off responsibility if an error was made in a 10k report. The executive is responsible for double-checking the work of any bookkeeper and assuring all reports are lawful, accurate and ethical.