Financial reporting includes the disclosure related to financial information to several stakeholders regarding the financial position and financial performance of the company over a specified time-period. These stakeholders involve creditors, debt providers, creditors, public, government agencies and government as well. In some of the organizations, the frequency regarding financial reporting is annual or quarterly. Financial reporting is frequently is known as an end product regarding accounting. The typical components related to financial reporting involve:
The Financial statements such as Profit and loss account, balance sheet, cash flow statement and statement regarding changes in equity of stakeholder.
- The notes to the financial statements
- Annual and quarterly reports
- Management discussion and analysis
There are several guidance notes and accounting standards that have issued by the Government and the ICAI (Institute of Chartered Accounts of India) that are applied for the objective related to financial reporting. It ensures uniformity across several diversified industries when they present and present their financial statements.
Objectives of Financial Reporting
As per IASB (international accounting standard board), the purpose of the financial reporting is “to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.”
Some of the purposes and objectives of financial reporting:
- Offering information to the management of the company which is utilized for the objective of planning, benchmarking, decision making and analysis.
- Offering information to promoters, investors, creditors and debt provider which is utilized to enable them to prudent decisions related to credit, investment etc.
- Giving information to the public and shareholders at large only in case of listed organizations regarding several aspects of the company.
- Giving information regarding the economic resources of the company claims to the resources and how these resources, as well as claims, have changed over the time-period.
- Giving information as to how the information is procuring as well as utilizing several resources.
- Giving information to several stakeholders related to the performance of organization’s management as to how ethically and diligently that are discharging their overall important duties and responsibilities.
- Giving information to the legislative auditors that in turn to make it a possible
- Improving the social welfare by focusing the interest of trade union, government and employees.
Importance of financial reporting
There are some points that elaborate the importance of financial reporting framework such as:
- One of the primary purposes of financial reporting is to offer the useful information regarding the decision making.
- The balance sheet captures the financial aspects regarding the business at the particular time-period.
- The cash flow projection is a report that maps the expenditures and income during the coming years.
- Law requires it for the purposes of
- Financial reporting provides creditors, investors and some other businesses an idea regarding the creditworthiness as well as the financial integrity of the organization.
- It provides the essential information that can use to create best decisions for the business.
Four different types of financial statements
- Income statement: This is the report that reveals the financial statement regarding the company for the overall reporting period.
- Balance sheet: This is the report that demonstrates the financial position regarding the business as of the document date. The information is aggregated into general categories of liabilities, equity and assets.
- Statements of cash flows: This is a report that reveals the inflows and outflows of cash experienced by the company while reporting period. These cash flows are separated into three different classifications such as financing activities, investing activities and operating activities. This particular document can be hard to assemble due to which it is commonly issued only to the outside parties.
- Statement of changes in equity: This report documents the overall changes in equity during the time-period of reporting. These changes involve the purchase or issuance of dividends issued, shares and losses or profits. This particular document not frequently involved when the financial statements are issued internally, as the entire information in it is not overly necessary to the management team.