Financial Reporting

Financial Reporting: Purpose and Objectives of FR

Financial Reporting: In every industry, whether it is manufacturing, retailing, or service, it includes multiple departments. All these departments work together on a daily basis in order to achieve organisational goals and led a business organisation towards growth. The functions of these organisational departments sometimes found interdependent or dependent, but at the day end, all these departments are linked together by the Accounting and Finance department. For conducting every single function related to business operation, each of the department needs tangible and intangible resources like fund, manpower and more. The fund allocated to each department for functioning needs to be accounted for properly because the act of utilising fund reflects in an organisation’s profit generation which is computed and monitored by the Accounting and Finance department. The accounting and financial aspects related to every single department of a business organisation are recorded as well as reported to different types of stakeholders of the organisation. The two different kinds of reporting are financial reporting which is made for the stakeholders and management reporting which is used by the organisation’s internal management.

Both these two types of reporting are vital as well as an integral part of a business organisation’s accounting and reporting system. Among these two corporate reporting systems, financial reporting is the critical and most important task for every business organisation. It is vital due to the presence of various stakeholders those who are involved in the organisation, and the existing statutory and other business-related regulatory requirements. Financial reporting is a very important part of a company’s Corporate Governance. The system of financial reporting allows a company to produce a number of statements which are able to disclose its financial status, future as a corporate to its management board, shareholders, potential and existing investors, and other external and internal stakeholders. Proper financial reporting practices led a company to ensure its sustainable corporate growth and development by creating a long-lasting trustworthy relationship with stakeholders and complying with the regulatory requirements. Now our expert from Instant Assignment Help will tell you about financial reporting with examples.

Financial Reporting
Financial Reporting

Discussion on Financial Reporting along with Definition and Examples

Financial reporting is the process of communicating with the users of a company’s financial statements by providing them financial statements containing financial information of the company. Here, the key users of the financial statements of a company are its creditors and investors. The financial reporting system is viewed as business organisations issuing their financial statements to the public. A company’s financial statements that are prepared for financial reporting purpose include the company’s income statement, balance sheet, statement of owner’s equity, and cash flows statement. However, financial reporting is much broader than just preparing and publishing the above mentioned four types of financial statements. Financial reporting system involves the disclosure of a company’s financial information in fronts of the management as well as to the public (if it is a publicly-traded company) about the way the company is performing during a specific time period.

Usually, financial reports are issued on an annual and quarterly basis which is not same as management reporting. Management reporting also includes financial information about a company but that is only disclosed in front of the company’s management board to assist them in making business decisions. Financial reports of a company are attached to the annual report of a public company. Moreover, this kind of reporting includes every financial communication between the business and outsiders. It includes press releases, management letters along with their analysis, shareholder minutes, auditor reports, and required notes in relation to the four different financial statements. In general term, anything that has the ability to convey financial data and information about a company to the general public is treated as some kind of financial reporting. The main aim of financial reporting is to reflect a company’s current financial position.

As discussed above, financial reporting is not only reporting the company’s financial information to the public. Other than annual financial statements, one of the common forms for a company’s financial reporting is management discussion and analysis i.e. MD&A which is issued by the management board that discusses the company’s current financial position and speculates on it future performance along with discusses on the potential market opportunities. A company’s management also discusses the company’s debt arrangements system, capital resource, and liquidity position. MD&A stands as a great element for creditors and investors to get some additional information, alongside the financial information, about a company which helps them to predict the company’s future performance. Financial statements, MD&A along with the other financial reports available for public as listed above give creditors and potential investors enough information which they can use in making their investment and other financial decisions associated with the company.

Examples

Financial reporting of a company includes:

  • Externally used financial statements like the statement of comprehensive income, income statement, balance sheet, statement of stockholders’ equity, and cash flow statement
  • The associated notes to the above mentioned financial statements
  • Interim reports or quarterly reports
  • Annual reports
  • Conference calls and press releases regarding the quarterly earnings of the company and other related information
  • Financial information disclosed on the official website of the company
  • Financial reports to the government agencies along with the quarterly reports as well as annual reports to the SEC (Securities and Exchange Commission) (for listed companies)
  • Prospectuses related to the issue of shares and other long-term and short-term securities
  • Management Discussion and Analysis i.e. MD&A (for public companies)

Purpose and Objectives of Financial Reporting

Financial reporting is aimed to serve two fundamental purposes. First purpose of financial reporting is to help a company’s management in making effective decisions concerning the overall strategies and objectives of the company. The data and information disclosed through the reports help management understand the company’s weaknesses and strengths along with its financial health. It also includes assisting the management to gauge the company’s financial strength and current marketing position. The second purpose of this reporting system is to provide relevant and reliable information regarding the company’s financial activities and health to its internal and external stakeholders which include its shareholders, consumers, government regulators, and potential investors. It is a means of assuring stakeholders about the company’s appropriate business operations. The publicly traded companies are subject to a set of very strict regulations of financial reporting that are enforced by the SEC and to continue business operations and financial reporting ethically, the companies are responsible to comply with such regulations.

Financial reports refer to the set of records and documents a company uses to put together for tracking and reviewing how much revenue it is making by conducting regular business activities. The central purpose of a company’s financial reporting is to deliver all kinds of business operation related information to its lenders as well as shareowners. Financial reporting acts as an essential part of the contract made between a company and its stakeholders. The investors and lenders hold the right to get clear and understandable information about the utilisation of the money they have invested in a company. They also have the right to know about whether the company spending their invested money wisely and making their investment able to provide monetary returns to them. Moreover, some other purposes of financial reporting are –

  • measuring whether a company is generating profits or suffering from losses, as well as the volume of such profit or loss
  • evaluating the way the company has stacked-up its assets against liabilities
  • monitoring and keeping a look on from where the business gets its capital, and
  • focusing on whether a company is making the good use of its capital and fund invested by investors
  • measuring whether further investment in a company is profitable or not
  • evaluating whether the company has enough fund or capital for ensuring its future growth.

According to IASB (International Accounting Standard Board), the main objective of financial reporting system is to deliver required information about a company’s financial position, operational and financial performance as well as each and every change in its financial position that are necessary to a large range of internal and external users in making financial decisions. In support of the statement made by IASB on the

Objectives of financial reporting following points are summed up:

  • Providing reliable information to a company’s management to make it able to use such information in the process of corporate planning, organising, benchmarking, analysing, and decision-making.
  • Delivering the required amount of financial information to the debt providers, creditors, investors, and promoters which could assist them to make prudent and rational decisions regarding further credit, investment and more.
  • Providing accurate information in relation to the company’s economic resources claims on those resources (owner’s equity and liabilities) and the way these resources, as well as claims, have experienced change (increased or decreased) over time.
  • Providing material information to the shareholders and the general public about different aspects of a company if the company operates as a listed company.
  • Providing relevant information to all the internal and external stakeholders of a company regarding the company’s performance management to inform them how ethically and diligently the company and its management board are discharging their fiduciary duties and responsibilities.
  • Serving required information about the way a company is procuring and using different kinds of resources.
  • Providing detailed financial data and material information to the auditors (statutory auditors) to facilitate them in performing the audit in an optimally effective and accurate manner
  • Enhancing the welfare of the society by keeping the interest of every employee, trade union, the general public, and Government. Now we will discuss the importance of financial reporting which is explained by Global Assignment Help.

Importance of Financial Reporting

Financial reporting is needed by every stakeholder of a company for multiple purposes and reasons and to them, the importance of financial reporting varies. For instance, financial reporting is important to the management board of a company in a different way than its importance towards potential investors, lenders, and existing investors. The basic importance of a company’s financial reporting includes its effectiveness in providing crucial information to the internal and external stakeholders to assist them in making better business-related monetary as well as strategic decisions. The following points highlight why financial reporting framework is important –

  • It helps companies to act in compliance with various regulatory requirements and statues. Every company is required to submit or file its annual financial statements to Registrar of Companies (ROC), and relevant Government Agencies. Here, it is mentionable that if the company is listed on any stock exchange then it needs to file its quarterly financial statements, and annual results both to the SEC as well as it need to publish the same.
  • Financial reporting facilitates a company’s statutory audit and assists auditors to prepare an accurate audit report. Statutory auditor(s) are appointed by a company to audit its annual financial statements and to express their opinion on the company’s corporate financial performance.
  • Financial reports of a company construct the backbone for its financial planning, organising, analysis, benchmarking, as well as decision making which are used by different stakeholders of the company for various purposes.
  • It helps the general public in analysing the financial performance of a company and the overall performance of the company’s management during a particular financial period.
  • Financial reporting system helps companies to raise required capital from both domestic and overseas companies and investors to restructure their capital and to expand their business operations in national as well as in international level.
  • In order to prepare a labour contract, bidding, government supplies, and another business-related contract, a company is needed to furnish its financial reports and statements to the relevant authorities.
  • It helps the management to predict a company’s corporate future, growth, and development by assisting it in measuring and analysing its profitability, and practices of managing assets and liabilities.

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