Financial reporting is done in order to analyze the business income and to report business income. The main purpose of financial reporting is to ascertain the usage of resources, cash flow, and performance of the business. It helps the management regarding how to manage the business as well as investors to take the right decision regarding investment.
What are the objectives of Financial Reporting?
Following are the various objectives of FR:
- Information to the investors
It gives the information to the investors
regarding the reinvestment made by the business and capital efficiency. FR helps investors to decide whether the investment should be made in such business or not.
- Information regarding the cash flows in the business
It enables to track the cash flow
in the business such as from where the cash flows are coming and the further investment made by the company. Whether the business is earning a profit or under the loss? This will help to know the performance of the business and whether it will be able to recover its debts or not?
- Analysis of financials
Through monitoring financial reporting we can analyze assets/liabilities and owner’s equity. It gives an understanding of what can be changed to improve the performance of the business. For the future growth, it also reflects the availability of resources.
For the purpose of financial reporting, taxation, accounting, and legal requirements are there which must be adhered. These requirements are also known as IFRS “International Financial Reporting Standards”.
Financial reporting is considered as a very crucial part of corporate governance. Now we will discuss the primary components and purpose of the financial reporting.
What are the Primary Components of Financial Reporting?
Primary components of FR include disclosure of financial information to the management of the business and to the investors to show the performance of the company over a specific period of time. Usually, FR is issued on a quarterly and annual basis.
Management reporting is different from financial reporting as it consists of the financial information which is required to be disclosed internally for the purpose of making an internal decision within the company. Financial reporting is a part of the company’s annual report.
Financial Reporting Components
What is the purpose of Financial Reporting?
There are two primary purposes of financial reporting such as
- FR helps management to take effective decision to achieve the object of the company timely. With this, management can work on its strengths and weaknesses, as well as on its overall financial health.
- It also provides the information regarding the financial health of the company to the shareholders and potential investors. It helps in carrying the functions of the company efficiently.
Analysis of the Financial Statements
Analysis of the financial statement is a part of FR. In financial reporting, a balance sheet reflects the assets and liabilities of the company.
There is a standard accounting model of a balance sheet: Assets = Liabilities + Equity.
Another important aspect is profit and loss statement (P&L), which is an income statement which reflects the company’s earnings over a period of time. Besides this, it shows the amount of revenue generated and the expenses incurred to operate the business.
In multiple GAAP’s, a financial report is prepared. Some of them are as follows:
Indian GAAP: While reporting financial statements, there are a set of accounting standards which must be followed by every company operating in India.
US-GAAP: There are the set of accounting principles which are adopted by the U.S. Securities and Exchange Commission. They are also known as GAAP or US GAAP.
IFRS: With IFRS, company accounts are understandable and comparable across the international boundaries.