Is financial reporting necessary in every business? Why is it part of most major businesses? Questions about this topic can go on and on without limit. In truth, yes all financial statements reporting is necessary for businesses especially businesses with different departments. This article holds answers you need to questions about financial reporting, also it includes its definition, analysis, Importance, as well as types. You will also find financial reporting examples and corporate financial reporting pdfs. Let’s go into full details on this topic, starting with the definition of financial reporting and a lot more.
What is Financial Reporting?
This is the process of analyzing the financial records of business activities within a period, compiling them, and then presenting them to the relevant bodies. In general, manufacturing or service companies in any industry with multiple departments that function daily to achieve common organizational goals are always linked together by the Accounting and Finance departments.
The Accounting and Finance department plays a vital role in every industry as they are responsible for the organization:
- Accounts Payable
- Payroll
- Reporting and Financial Statements
- Accounts Receivable and Revenue Tracking
- Financial Controls
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Definition of Financial Reporting
The financial report is the disclosure of financial information of an organization to its stakeholders and the public over a specified period. The report is the key function of the financial controller with the assistance of the investor’s relations officer if the organization is publicly held.
The stakeholders of the organization include; investors, creditors, the public, debt providers, governments & government agencies. However, to explain this in other words, financial Reporting has its importance and is usually considered an end product of Accounting and is usually reported quarterly & annually.
Financial reporting includes the following documents and components:
1. The Financial Statements: This includes the income statement, balance sheet, statement of cash flows, statement of changes in stockholders equity, and profit, and loss reports.
2. Notes to financial statements.
3. Quarterly or Annual reports issued to shareholders (in the case of listed companies).
4. Prospectus issued to potential investors concerning the issuance of the organization securities: This is mainly for companies going for IPOs
5. Statement of changes in equity or Statement of retained earnings: Reports on the changes in equity of the company during the stated period, such as a fiscal quarter or year.
6. Management discussion and analysis: Basically, financial reports can be very detailed and complex for every publicly held corporation. They typically include extensive footnotes, as well as a management discussion and analysis (MD&A). The notes provide details about each item on the balance sheet, income statement, and cash flow statement, including insights into the accounting method.
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Financial Reporting and Analysis
The financial reporting and analysis the important help to answer a host of vital questions on all aspects of every organization’s financial activities. However, giving both inside and outside stakeholders accurate, comprehensive details of the metrics they need to make decisions and take informed action.
Therefore, we can define financial reporting and analysis as the process of analyzing an organization’s financial report for decision-making purposes. Outside stakeholders use it to understand the overall health of an organization as well as to evaluate financial performance and business value. Internal constituents use it as a monitoring tool for managing the finances of the organization.
Generally, several techniques are commonly used in analyzing financial statements. However, the main core techniques frequently used by financial analysts include vertical analysis, horizontal analysis, and ratio analysis.
In addition, the main task of an analyst is to perform an extensive analysis of the three main financial statements which are; The balance sheet, The income statement, and the Statement of cash flows.
Financial Statements
Financial statements are used by organizations to manage the operations of their business and also to provide reporting transparency to their stakeholders. However, the three statements as explained below are interconnected and create different views of a company’s activities and performance.
The balance sheet is one of the three fundamental financial statements. They are key to both financial modeling and accounting. However, the balance sheet displays the company’s total assets, and how these assets are financed, through either debt or equity. Generally, Assets are equal to Liabilities plus Shareholder’s Equity.
In financial statements, a company’s book value is referred to also as shareholders’ equity. This value is an important performance metric that increases or decreases with the financial activities of an organization.
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Hence, the balance sheet metrics can be divided into several categories, which include;
- Liquidity ratios: Quick ratio, Current ratio, and Networking capital (NWC) which is the difference between a company’s current assets (net of cash) and current liabilities (net of debt) on its balance sheet.
- Leverage ratios: Debt to equity, Debt to capital, Debt to EBITDA, Interest coverage, and Fixed charge coverage ratio.
- Operating efficiency ratios: Inventory turnover, Accounts receivable days, Accounts payable days, Total asset turnover, and net asset turnover.
Three Basic Techniques For Proper Financial Statement Analysis
The following are the three basic techniques for proper financial statement analysis;
#1. Income Statement Analysis
The income statement breaks down the revenue earnings of an organization. Meanwhile, this runs against the expenses involved in the business to provide a bottom line of the net income profit or loss over some time.
This type of statement is divided into three parts to enable efficient analysis. The revenue and the direct costs associated with revenue to identify gross profit come first, then operating profit which subtracts indirect expenses such as marketing costs, general costs, and depreciation, and finally, the net profit which deducts interest and taxes.
#2. Horizontal Analysis
The horizontal analysis compares data horizontally, by analyzing values of line items across two or more years.
#3. Vertical Analysis
The vertical analysis looks at the vertical effects line items have on other parts of the business and also the business’s proportions.
#4. Ratio Analysis
Ratio analysis uses important ratio metrics to calculate statistical relationships.
#5. Cash Flows Statement Analysis
The cash flow statement provides an overview of the company’s cash flows from operating activities, investing activities, and financing activities. Moreover, net income is carried over to the cash flow statement where it is included as the top line item for operating activities. Like its title, investing activities include cash flows involved with firm-wide investments. The financing activities section includes cash flow from both debt and equity financing. The bottom line shows how much cash a company has available.
#6. Free Cash Flow and Other Valuation Statement
Companies and analysts also use free cash flow statements and other valuation statements to analyze the value of a company. Generally, Free cash flow statements arrive at a net present value by discounting the free cash flow a company is estimated to generate over time. Therefore, private companies may keep a valuation statement as they progress toward potentially going public. Get more business valuation and all you need to know here.
Importance Of Financial Reporting
However, let’s look at the importance of financial reporting because it cannot be overemphasized. The following points highlight why the financial reporting framework is important:
- Taxes: Taxes are arguably the biggest reason for the importance of financial statement analysis. you have to use it! The government utilizes such reports to ensure that you’re paying your fair share of taxes.
- For other companies, shareholders, and investors: If an investor, individual or corporate body wants to invest money in a company, is crucial they know how healthy is the company. Meanwhile, this should be according to a standardized litmus test; not measurements that a company has fabricated to make themselves look good. This is where financial statements play a vital role for investors.
- For internal decisions making – It is important that financial reports are accurate – otherwise, any management reports based on them will be sitting on a shaky foundation. This is where organizations can run into trouble, using legacy methods rather than reaping the benefits of financial reporting by utilizing financial dashboards instead.
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- To improve internal vision – Financial analysis and reporting are accurate, cohesive, and widely accessible means of sharing critical financial information throughout your organization. It also helps to answer a host of vital questions on all aspects of your company’s financial activities, giving both internal and external stakeholders an accurate, comprehensive snapshot of the metrics they need to make decisions and take informed action.
- For raising funds and performing good audits – Financial reporting and analysis help organizations, regardless of industry, in fundraising both domestically and overseas in a well-managed, fluent way. It is an essential component of ongoing commercial success in today’s competitive digital world. Also, to facilitate statutory audits. Reporting tools or software will give this official concise, accurate, and compliant information which is very vital.
Types of Financial Reporting
Basically, in every organization, the importance of financial reporting and statements as we discussed earlier in this topic plays a vital part and has many types. As it helps them and their investors to have proper knowledge of how cash flows in and out of the organization. However, it helps both internal and external shareholders of the organization to have a clue about the financial health of the organization they have invested in or are about to invest in.
Generally, five types of financial reporting and examples are prepared by an entity monthly, quarterly, annually, or within the period required by management.
These five types of financial reporting as we explained above in this topic include:
- Income statements
- Balance sheet
- Statement of changes in shareholders’ equity
- Cash flow statements
- The Noted (disclosure) to financial statements.
Financial Reporting Examples
Financial Reporting Examples include the following:
- External financial statements (income statement, statement of comprehensive income, balance sheet, statement of cash flows, and statement of stockholders equity
- The notes to the financial statement
- Press releases and conference calls regarding quarterly earnings and related information
- Quarterly and annual reports to stockholders
- Financial information posted on a corporation’s website
- Financial reports to governmental agencies including quarterly and annual reports to the Securities and Exchange Commission (SEC)
- Prospectuses on the issuance of common stock and other securities.
Corporate Financial Reporting pdf
Here are some Corporate Financial Reporting examples pdf to give you more glue on financial reporting:
- Corporate financial reporting: Firm characteristics and the use of the internet as a medium of communication by listed firms in Ghana
- The Usefulness of Corporate Financial Reports: Evidence from the United Arab Emirates
- Corporate Financial Reporting in Nigeria
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What Is the Primary Goal of Financial Reporting?
Tracking, analyzing, and reporting. These are the main purpose of financial reporting. Generally, it is to track, analyze and report a business’s financial activities. It unveils the financial health status of a business and also helps investors in making well-informed decisions about how to run the company.
What Are the Elements Used to Draw up a Business Report?
The following are the seven key financial documents assets, liabilities, equity, revenues, expenses, gains, losses, investment by owners, distribution to owners, comprehensive income, and so on.
What Are the 3 Most Important Financial Statements?
In assessing the financial health of a business, the most important reports are the income statement, balance sheet, and cash flow.
What Is Good Financial Reporting?
High-quality reporting gives information that can be used to make decisions. This information is relevant and shows the economic reality of the company’s activities during the reporting period as well as its financial situation at the end of the period.
What Is KPI in Financial Reporting?
performance indicators (KPIs) are numbers that companies use to track, measure, and analyze their financial health. There are many categories for these financial KPIs, such as profitability, liquidity, solvency, efficiency, and valuation.
What are the 5 main KPIs?
In general, the five most prevalent KPIs are as follows:
- Revenue increase.
- Revenue per client.
- Profitability.
- Client retention rate.
- Customer contentment
Which Financial Report Is Prepared First?
This breaks down your company’s revenues and expenses. You need to prepare this first because it gives you the necessary information to generate the other financial statements. Making your income statement first lets you see your business’s net income and analyze your sales vs. debt
Conclusion
Generally, the importance, examples, and types of financial reporting are the vital cogs in the wheel of understanding the operations and position of a concern. Although, the major forms of reporting like the financial statements ensure the operations are adequately captured, it is essential that the reporting also makes way for the understanding and readability of such figures. It is important that the reporting captures the major attributes of the functioning without being vague or overly complex.
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