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Fiscal year

Fiscal year is the business year used for accounting purposes. Most companies use the calendar year, but any date can be chosen as the first day of this 12-month period.

Expanded Definition

The Motley Fool, fittingly enough, starts its fiscal year on April 1 (April Fools' Day). That's good for a grin, but fiscal years are most important for investors because they allow apples-to-apples comparisons of metrics that measure how well a company is doing. Each fiscal year is divided into four quarters of three months each. Since the fiscal year can start on any day, a company could be reporting fiscal year (FY) 2009 numbers before 2008 has passed on the calendar. A fiscal year is denoted by the year in which it ends. The 12-month period running Jan. 1, 2007 - Dec. 31, 2007 is FY 2007. The period running July 1, 2004 - June 30, 2005 is FY 2005.

The SEC requires companies to include data from their previous fiscal year in reports to the commission, so the public can see, for instance, if sales skyrocketed, if margins contracted, if revenue stayed flat. Comparisons are made in two ways: year-over-year/year-ago (comparing the third quarter of this year to the third quarter of the previous year) or sequentially (comparing this year's third quarter to this year's second quarter).

The standardization of a company's fiscal year increases the validity of comparisons. If Q3 includes the holiday selling season one year, you want to be able to compare that to the corresponding three-month period from the previous year, not to a quarter without that supercharging.

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