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5 Min. Read

What Is Financial Reporting?

Financial reporting uses financial statements to disclose financial data that indicates the financial health of a company over during a specific period of time. The information is vital for management to make decisions about the company’s future and provides information to capital providers like creditors and investors about the profitability and financial stability of the company.

This article will also review the following areas:

7 Reasons Financial Reporting Is Important

What Is the Purpose of Financial Reports?

What Is Included in Financial Reporting?

7 Reasons Financial Reporting Is Important

Financial statements provide various important financial information that helps investors, creditors and analysts evaluate a company’s financial performance. A lot of the financial information in financial reported in required by law or by accounting standard practices.

Financial reporting helps management communicate the past successes and future expectations of the business.

Here are a few reasons why financial reporting is important to your business:

Tax Purposes

The most important reason to use financial reports is that you have to and required by law to do so. The Internal Revenue Agency uses these reports to make sure you’re paying your fair share of taxes.

Businesses that make a lot of profit have to pay quite a lot of taxes. Accurate financial reporting helps reduce their tax burden and helps them ensure that all their resources are not depleted in a short amount of time.

Showing Financial Condition

Potential investors want to know how well the company is doing before they invest. Investors, creditors and other capital providers rely on a company’s financial reporting to gauge the safety and profitability of their investments. Stakeholders want to know where their money went and where it is now. Financial statements like the balance sheet address provide detailed information about the company’s asset investments and outstanding debt and equity components. Investors and creditors can use this information to better understand the company’s position and capital mix.

Evaluating Operations

The information on a balance sheet is a snapshot of a company’s assets, liabilities and quite at the end of a financial period. However, a balance sheet doesn’t show what operational changes might have occurred to cause changes in the financial condition of a company. Operating results during the period is also something investors need to consider. Financial reporting done on an income statement shares results about sales, expenses and profit or losses. Using the income statement, investors can both evaluate a company’s past income performance and assesses future cash flow.

Examining Cash Flow

A company’s profits are reported in the income statement but provide no direct information on the company’s cash exchange. A company incurs cash inflows and outflows during a period from non-operating activities, namely investing and financing. Cash from all sources, not revenue from operations, is what pays investors back. That’s why a cash flow statement is an important statement for an investor to review. The cash flow statement shows the exchange of cash between the company and the outside work during a period of time. By reviewing this statement, investors can know if a company has enough cash to pay for expenses and purchases.

Sharing Shareholder Equity

The statement of shareholders’ equity is important to equity investors. It shows the changes to various equity components like retained earnings during a period. Shareholder equity is a company’s total assets minus its total liabilities and represents a company’s net worth. Steady growth in a business’s shareholders’ equity because of increasing retained earnings, as opposed to expanding shareholder base, means higher investment returns for current equity shareholders.

Decision-making, Planning and Forecasting

When a business needs to make a decision, analyzing financial statements is crucial. Managers can look at the value of the assets that a business currently holds and decide if they can afford to purchase more. Conversely, when the value of assets is severely depreciated, managers can decide if they need to be sold off.

Mitigate Errors

Accurate financial reporting can help business’s catch costly mistakes and inter errors early on in the process. There is no better way to detect illegal financial activities than catch discrepancies in financial statements. Through a reconciliation process, errors that have been made can be found. Companies spend a lot of time reconciling their books of accounts and verifying each journal entry, so they can find if an accounting error has occurred or if anyone has tampered with any part of the business.

What Is the Purpose of Financial Reports?

Generally, financial reporting provides information about the results of the operation, financial position and cash flows of a business. Readers review the statement to decide the allocations of resources.

Financial reporting is a way of following standard accounting practices to give an accurate depiction of a company’s finances, including:

  • Revenues
  • Expenses
  • Profits
  • Capital
  • Cashflow

What Is Included in Financial Reporting?

The process of producing statements that disclose a business’s financial status to management, investor and the government is known as Financial Reporting.

Financial reporting includes:

  • external financial statements (income statement, statement of comprehensive income, balance sheet, statement of cash flows, and statement of stockholders' equity)
  • notes to the financial statements
  • communication regarding quarterly earnings and related information through press releases and conference calls
  • quarterly and annual reports to stockholders
  • financial information posted on a business's website
  • financial reports to governmental agencies including quarterly and annual reports to the Securities and Exchange Commission (SEC)
  • documentation pertaining to the issuance of common stock and other securities