The financial results of an organization that are disclosed to its stakeholders and the general public are known as financial reporting. The controller's responsibility for this reporting is crucial, and if an organization is publicly traded, the investor relations officer may help.
As part of financial reporting, companies often release financial statements like the income statement, balance sheet, and statement of cash flows. In accordance with accounting regulations, companies may also include supplemental footnote disclosures that offer more details on particular topics.
Why Is Financial Reporting Important?
tale that financial reporting and its elements tell about the financial health of an organization. The requirement that financial reporting packages adhere to Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), which ensure reliability and uniformity, is a crucial foundation. More specifically, the following four goals depend on financial reporting:
- Raising capital: The financial history of a firm is particularly significant when that company seeks to generate funds, whether through public markets, private investments, or loans. Financial reports are used by third parties to judge a company's creditworthiness and operational sturdiness.
- Reassurance:Although most financial reporting is retroactive, it can also be used to anticipate future performance and viability by investors, partners, and even customers and suppliers. For instance, based on the trajectory of the company's sales, suppliers may utilize a company's financial reporting to decide whether to begin a business relationship.
- Financial analysis: Internal management relies heavily on financial reporting because it forms the basis for KPI measurement, operational analysis, and even employee remuneration. For instance, reviewing a dashboard of accounts receivable KPIs, such as day's sales outstanding, can assist senior management in forecasting cash flow and evaluating the efficiency of the billing and collection team.
- Compliance and law: The fact that financial reporting complies with regulations and rules makes it crucial as well. Most businesses have at least one ongoing shareholder whose engagement necessitates regular financial reporting. The SEC might be that for publicly traded corporations. Private businesses may have loans with periodic reporting requirements for certain debt covenants. In addition, the Internal Revenue Service (IRS), referred to as a "universal stakeholder" for all US businesses, has a legal obligation to compel financial reporting.
What Is Included In Financial Reports?
The Income Statement
A business's sales, costs, and earnings for a given time period are summarized in the income statement. The "top line" in this report refers to the sales total, and the "bottom line" refers to the stated profit or loss at the bottom of the report. Because it displays an entity's financial performance, this report is the one that is examined the most carefully of all the others.
The Balance Sheet
The balance sheet gives a comprehensive picture of a company's assets, liabilities, and shareholders' equity as of a particular date. Almost always, the last day of the time period utilized to create the accompanying income statement is this day. By contrasting different asset and liability line items, it can be used to assess a company's liquidity and its capacity to pay off debts.
The Statement of Cash Flows
The statement of cash flows gives an overall picture of a company's cash flows related to its financing, investing, and operating activities. This report is helpful for assessing how money is used within a company. Compared to the income statement, it may provide a more accurate picture of a company's viability.
The Statement of Retained Earnings
The statement of retained earnings is the least important report. It details every modification to a company's retained earnings during the course of the reporting period. It is frequently left out of the reporting package for financial statements.
- Accounting's financial reporting process disseminates financial information to both internal and external parties, including shareholders, lenders, and senior management.
- Although the standards for external financial reporting vary for public and private businesses, the reports are always required by law for tax reporting.
- Financial reporting packages typically comprise the financial statements, SEC forms, annual report, and MD&A.
- Through automated processes, integrated financial reporting software contributes to the accuracy and timeliness of financial reporting, with the added benefit of enabling resources to be redeployed to analysis and action.