The Comprehensive Guide on How to Read a Financial Report: Wringing Vital Signs Out of the Numbers, + Website

CHAPTER 23

PROFIT ANALYSIS FOR BUSINESS MANAGERS

Why All Businesses Should Produce and Use Two Types of Financial Statements

Unless you started reading this book right at this point, you’re aware that the previous chapters focused on the external financial statements prepared and reported by businesses. External financial statements are designed for external distribution to the general public (e.g., a publicly traded company such as Amazon) or to a select group of external parties, such as a bank or taxing authority, from a privately owned business. Under either scenario, the same basic concept holds when financial statements are distributed to external parties. The financial statements and associated information is designed for review and evaluation from the “outside looking in.”

So if logic holds and external financial statements are prepared and reported to external parties, then internal financial statements should be prepared and reported to a company’s internal management team and employees to support critical business decision making functions. By the way, we are not suggesting that a company should keep two sets of accounting books and records as this would be both very inefficient and potentially, illegal. No, the idea is that the same accounting system used to produce financial information for external distribution and reporting should be designed to report the critical internal information on which business decisions are based. The key differences between internal and ...