Businesses use financial reports to show their stakeholders information concerning their money. They are obtained to ensure a business demonstrates financially sound will and hence accomplish its strategic goals. In this article, we will look at the major components of financial reporting, some of the things professionals recommend doing while tackling it, and what makes it difficult.
What is Financial Reporting?
By the most cited definition, financial statements entail preparing and presenting financial information about a company to stakeholders like investors and creditors or regulators who may then determine its financial performance for themselves. The financial information of a business must be availed to its stakeholders using financial reporting for them to evaluate the firm’s performance and make informed decisions.
Involving following certain regulations required in a given jurisdiction, this reporting ensures that any company reports its finances fairly and consistently. Financial reporting help investors in making decisions about whether to put their money in given firms or not, on grounds of profitability analysis among other things that they would want looked at before investing anything in these entities so far as markets are concerned.
Types of Financial Reporting
There are four main types of financial reporting:
- Balance sheet: A company’s balance sheet is a financial statement which shows how much money they have for any given time.
- Statement of Income: This is where the financial performance of a business entity is discussed over some period.
- Statement of Cash Flows: The amount of money going in and out of business during a certain period is presented through the Cash Flow Statement.
- Statement of Retained Earnings: Retained earnings statement shows the movement in a company’s retained earnings over a time period.
Pros and Cons of Financial Reporting
Financial reporting has several pros and cons, including:
Pros
- Provide crucial financial information to stakeholders so they to make informed decisions.
- Increases both transparency and trust among investors and creditors.
- Making it easier for companies to evaluate how they are performing and know where they can do better by comparing themselves with others in the same field.
- Assist organizations in making strategic choices that permit goal and target setting.
- Support employers to locate inefficiencies areas leading to changes where necessary.
- Stand as a guideline in financial analysis and planning.
- Allow companies to meet accounting rules and regulations requirements.
Cons
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A layman may find information about accounting complicated and hard to comprehend at times.
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Sometimes fraudulent accounting or financial misstatement does not allow the financial statements to reflect the true company’s financial position.
- Preparing them is expensive and time-consuming, especially at lower levels while large corporations can outsource this function.
- Sometimes, those preparing them do not consider aspects like social responsibility or environmental concerns.
- Accounting standards and regulatory requirements can influence financial reporting, which may not always reflect a company’s true financial position.
- it might not offer a company’s full financial performance because there are inadequacies in accounting methods and disclosure.
- Can be subject to errors or fraud that could lead to financial misstatement and loss of trust.
- Moreover, it doesn’t work well for some businesses like those with unique or complicated financial structures.
Importance of Financial Reporting
The importance of financial reporting includes:
- Making informed decisions.
- Being transparent and accountable.
- Compliance with regulations.
- Planning strategically and budgeting.
- Evaluating performance.
Who Uses Financial Reports?
Many interested parties like investors, analysts, creditors, regulators, etc. use Financial statements as they are one type of financial report. Also, it estimates the profitability of a firm. Moreover, it determines whether it has any possibility for development. Besides, creditors employ financial reports to judge a company’s creditworthiness and decide on providing lending services.
Additionally, regulators adhere to accounting standards and regulatory requirements by using financial reports. Management uses financial reports for making strategic decisions and evaluating performance.
Conclusion
Most importantly, financial reporting is important in giving crucial financial information and aiding in decision-making. Transparency, accountability, and strategic decision-making are among the advantages of financial reporting. Companies cannot overstate the importance of financial reporting, despite the various places where the practice is applied.
Moreover, it is also a discipline that keeps on changing hence requiring one to always learn new things and adapt to different environments.
We believe that this article has helped to shed some light on the financial reporting process. We would like to assert that financial reporting acts as the means of communication in business, it is important to know this to be successful.
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