What Is Financial Reporting?
Financial reporting gives you an accurate depiction of your company’s finances, such as revenues, expenses, cash flow, capital, profits, etc. It is a set of formal records providing helpful insights into your company’s financial information and health over a specific period. These reports don’t really offer much information about the company’s working culture and management structure; however, they are crucial for your company’s success; here’s how.
This information is vital for management in order to make sound decisions about the company’s future financial activities. Besides, the information helps investors and creditors know about your company’s financial stability or profitability.
If you want to make full use of your financial data, you may consider using online data analytics tools. This will help you leverage insights that you can use to make considerable improvements to business areas that are inefficient.
Whether you are looking to streamline your company’s financial transactions and reports, want to become aware of why financial accounting and reporting are essential or looking to gain knowledge on financial analysis, this article will help you get all your queries resolved; let’s read through it.
Purpose of Financial Reports
Financial reporting provides essential information on your company’s cash flow, financial position, and what results in your operations are bringing. It is majorly about following standard accounting practices to get an accurate depiction of your company finances. You can review the statement to decide where you want to allocate monetary resources.
What is All Included in Financial Reporting?
Financial reporting includes producing statements that help you disclose your business’s financial status to management, investors, and the government. Moreover, it plays an integral part in management accounting. Financial reporting includes:
- Information regarding quarterly earnings
- Quarterly and annual reports for stockholders
- Different financial statements such as income statement, balance sheet, cash flow statement, statement of stockholders’ equity
- Financial reports to government agencies
- Quarterly and annual reports to SEC – Securities and Exchange Commission
- Documentation applicable for the issuance of stocks and other securities
Financial Reporting Analysis
Information in your financial statements is useful data that you can use to evaluate your company’s past, current, and projected financial performance.
1. In the U.S., financial statements are required to comply with generally accepted accounting principles (GAAP).
In general, financial reports are issued quarterly and annually, and while following these principles, your company must generate and maintain three primary financial statements, which are as follows.
Income Statement: Income Statement: It reports your company’s income, expenses, and profits incurred over a specific period.
Cash Flow Statement: It reports your company’s cash flow related activities that are generally referred to as sources and uses of cash.
Balance Sheet: This statement reports about your company’s assets, liabilities, and equity at a specific time period, commonly at the end of a fiscal quarter or year.
Public companies have to follow stricter standards (GAAP) when it comes to financial reporting and must use the accrual accounting method. Private companies enjoy a little flexibility in the preparation of their financial statements; they can use either cash or accrual accounting.
2. The International Financial Reporting Standards (IFRS)
This system is utilized in more than 110 countries globally, including Australia, China, India, Canada, etc.; however, India and China have customized their own version of the IFRS.
3. The General Data Protection Regulation (GDPR)
The GDPR is designed to modernize special laws to protect individuals’ personal information. This means if you are managing sensitive financial data, insights, and metrics of yours or your clients/partners, you need to ensure your reports are in compliance.
Since accounting is a complicated process, and there are many complexities involved in preparing and reporting business financials, several companies also hire external financial reporting services to prevent costly errors that might lead to IRS penalties. For financial statement analysis, companies use several techniques, out of which some of the most important are as follows:
- Horizontal Analysis: It compares data horizontally by analyzing line items’ values across two or more years.
- Vertical Analysis: This looks at the vertical line items you have on your business’s other parts and its proportions.
- Ratio Analysis: This method uses essential ratio metrics in order to calculate statistical relationships.
The Importance of Financial Reporting & Analyses
To understand the importance of financial reporting and analyses, let’s discuss some contributing factors.
1. Taxes
The most significant importance of financial statement analysis is in taxes. Business taxes are vital, and you need to use financial analytics tools to prepare your tax files. The government utilizes these reports to make sure your company is paying appropriate tax returns. You might not know this, but the government’s requirements for these documents gave birth to an entire industry of auditors and auditing firms that review companies’ financial reports independently.
2. To Provide Accurate Information to Investors, Shareholders, etc.
Suppose you are planning to invest your money in a company, you might want to know about that company’s financial performance before investing. Similarly, your company’s financial statements are important for shareholders, banks, investors, and companies who provide you credit. All these need to gain accurate data on how likely they will get paid back and set interest accordingly.
3. For Internal Decision-making
Financial reports must be accurate because otherwise, management reports (using which you make most decisions) are likely to be set on an unstable foundation. This might lead your company to get into trouble; for example, inaccurate financial statements will make reports that have errors, leading to more problems in reporting and tax filing, budget projects, etc.
4. For an Enhanced Internal Vision
Financial analysis and reporting are helpful in sharing valuable information through departments in your company. These help you get answers to all your queries concerning your company’s financial activities and performance; you learn a lot about improving the company’s financial position and making informed decisions accordingly.
5. For Auditing Purposes
Financial analysis and reporting enable you to perform statutory audits. Auditors audit your company’s financial statements so that they can analyze and express their opinions on the same. Reporting tools and software can help you get concise, accurate, and compliant information that is undoubtedly vital for business success in the current times.
Conclusion
Financial reporting will retain its credibility if you use it as it is designed; it provides you with reliable information that is relevant and helps understand economic activities and transactions incurring in your company.
If you want to make full use of your financial data, you may consider using online data analytics tools. This will help you leverage insights that you can use to make considerable improvements to business areas that are inefficient.