Financial reporting is the process of recording and disseminating information on financial performance and activities across certain time periods, usually on a quarterly or annual basis. Financial reports are used by businesses to compile accounting data and present their current financial situation.
There are two distinct reporting kinds listed:
- Financial reporting for different stakeholders
- Management reporting is used for internal organizational management.
- Financial statements are written records that outline an organization’s operations and financial performance.
- The balance sheet gives a quick picture of the company’s assets, liabilities, and shareholders’ equity.
- The revenues and expenses incurred by a corporation during a specific time are the main subjects of the income statement.
- The statement of changes in equity keeps track of whether profits are dispersed to third parties or are kept in-house for future expansion.
Financial information is used by investors and financial analysts to assess a company’s performance and forecast where the stock price will go in the future. The annual report, which includes the company’s financial statements, is one of the most significant sources of trustworthy and audited financial information.
Investors, market analysts, and creditors assess a company’s financial status and profit potential using its financial statements. The balance sheet, income statement, and statement of cash flows are the three main financial statement reports.
IMPORTANCE AND BASIC COMPONENTS OF FINANCIAL REPORTING
- Balance Sheet: The balance sheet includes specific investments of the company’s asset investments and displays the financial status of the business. The amount of debt and equity held by the corporation is also shown on the balance sheet. Investors and creditors can better comprehend the situation and performance of the company with the help of this capital mix, Different things are reported differently under IFRS and US GAAP.
- Income statement: Income statement consists of sales, costs, losses, and profits. These statements can be used to assess the company’s previous performance and forecast future cash flows for investors. Certain expenses, such as restructuring charges, are classified differently under IFRS and US GAAP.as well as handling and shipping fees. Depreciation costs are an essential expense. Likewise, regarded extremely differently, as are discontinued operations.
- Cash flow statement: shows the inflow and the outflow of the cash flow in and out of business during the financial period. It gives the investors an idea that the company has enough funds to pay for its expenses and purchases. The cash flow statement has all three main headings, i.e., Operating, Investing, and Financing. It gives the business an overview of the entire business.
- Statement of Equity: Because it illustrates changes in components like retained earnings throughout the course of the term, it is particularly significant to equity shareholders. Equity and debt are divided, and the difference reveals a company’s net value. In contrast to growing shareholder value, a company with a consistent increase in retained earnings is sustainable.
- To the management: The management must have current, accurate, and thorough information on the company and its financial situation due to the complexity and size of the enterprise. The management can better comprehend the company’s performance in relation to other companies and the industry thanks to the financial situation. Giving management reliable data enables them to create appropriate business policies and make wise judgments, The effectiveness of management is ranked in these terms. The effectiveness of these statements will aid management in defending their actions to all stakeholders concerned with the firm.
- To the shareholders: Owners of the company are the shareholders, although they are not involved in daily operations or decision-making. The shareholders are nonetheless informed of these results at the yearly AGM.
The shareholders can gauge the performance of the business thanks to these statements. They can assess both past and present performance using this information. For existing and potential consumers, financial statements are the most crucial source of information. They require it to comprehend the dividend pay-out ratio as well and project future dividend payments.
- To the creditors and lenders: The key indicators in the financial accounts are used to evaluate elements including liquidity, debt, and profitability. The company’s debt status worries creditors and lenders the most. A corporation is over-leveraged if its debt level is higher than that of its competitors in the same industry. They can decide if they want to proceed and pick their next steps by critically evaluating these assertions.
- To the Employees:For their staff, several businesses provide distinct financial statements. Employees want business information primarily for two reasons: their current pay and potential compensation reviews the future. They’ll be curious to learn about both the present situation and the expected future earnings.
- To the government: The fact that the government uses financial statements for taxation purposes adds to their significance. The government evaluates the health of the economies using the financial performance of these businesses in various industries.
OBJECTIVES OF FINANCIAL REPORTING
- Provide comprehensive data to a company’s management for use in planning, benchmarking, analysis, and decision-making.
- supplying information to creditors, promoters, debt providers, and investors to enable them to make sane and responsible investment, credit, etc. decisions
- Describe in detail the various facets of the organization to the shareholders and the public in relation to listed firms.
- To offer information on an organization’s financial resources claims made against those resources (liabilities and owner equity), and how these resources and claims have changed over time.
- supplying details on how a company is spending its resources.
- Providing information to various stakeholders regarding the execution.