What is financial reporting?
Financial reporting is the disclosure of important financial information and other activities of the enterprise to various stakeholders (investors, creditors/bankers, the public, regulators, and government) to help them get an idea of the actual financial condition of the enterprise at any time. right on time.
In today’s world economy, we have a well-developed banking system and capital markets. There is a separate ecosystem for investors, venture capital funds, etc. Let’s call them entities with financial resources.
On the other hand, there are sophisticated financial reports for commercial companies as well as start-ups. It may need financing or investment at some point in its life cycle or at another. Let’s call them the entities that need financial resources.
The thread that brings these stakeholders together on a common platform is – Financial Reporting.
Purpose of financial reporting
- Highlight the company’s achievements periodically. Accomplishments can be financial such as increase in sales, profits and market share, as well as achievements, and can also be in the form of awards and certificates obtained, breakthrough in research and development, etc.
- To provide financial information about the company to investors, creditors, bankers, the public, regulators and the government.
- It is also used to market itself by companies that rely on external financing. Investors rely heavily on these reports to make their yes or no decisions. Thus it helps in raising the capital.
- To convey a strategic roadmap for the company’s future. During stressful times or loss phases, it is used to allay investor fears and strategic plan to change the course of the company.
- Internal financial reports in accounting are used periodically by some companies to keep employees well informed about their operations and financial condition and as a tool to motivate them.
- To comply with legal requirements. Organizations are required to submit reports to various agencies such as Republic of China, government and stock exchanges on a quarterly or annual basis.
- To provide information about how the Company uses the various resources at its disposal. It helps clients stay up-to-date on the state of the company, thus building levels of trust.
What is included in financial reports?
As is evident from the name, financial reports usually constitute an overview of financial performance. The financial reports may be quarterly and annual or perhaps initial reports and prospectus in the case of new start-ups.
Here are some of the main highlights:
#1 – Financial Statements
It includes the balance sheet, profit and loss statement, and cash flow statements. Some companies may have stand-alone and consolidated financial statements if they have two or more different units. This data is just a quantitative reflection of the organization’s performance.
#2 – Director’s Report
Explains the financial statements. Provides information on operational performance, highlights and accomplishments. During the period of poor performance, it gives reasons for poor performance.
#3 – Management discussion and reporting
Management analysis and discussion provides information on the current position of the company against its peers in the industry. One learns about industry trends. It also contains information about future strategies and opportunities.
#4 – Capital Structure
Inform stakeholders of the organization’s capital structure and changes, if any;
#5 – Notes on accounts
It includes the accounting methods and policies that a company uses to record its transactions
#6 – Auditors Report
provide an opinion that is independent of the statutory auditor; About the company’s financial statements and the accounting policies used.
#7 – Corporate Governance Report
Provides information about the board’s composition and profile. It also talks about remuneration paid to senior management and compliance with other legal requirements.
#8 – Prospectus
For a company seeking to go public, the prospectus contains all information about the financial statements, operations, management, product mix, and financial reporting of the organization’s business objectives.
#9 – Earnings Call
Earnings calls are generally teleconferences where a company’s financial performance over a given period is discussed with investors, a financial reporting analyst.
In short, we can say that it creates an information ecosystem that can be used by various stakeholders to achieve multiple objectives of financial reporting in accounting. Good practices improve the efficiency of markets as information is readily available to all stakeholders.