Finance is an essential element to everyone, from an individual to big business firms. Hence, finance reporting is also necessary to appropriately manage, organise and understand the finances. An individual does it on a small scale, whereas highly qualified experts with knowledge of financial accounting are needed to maintain the financial reports of a company.
At first, reporting such big financial data might be overwhelming but a good command of the subject can simplify the process.
Now, with strict laws that demand error-free financial reporting, especially from big firms, the job of certified accountants has gained more prominence. Therefore, exploring the subject of financial reporting can help anyone aspiring to be an accountant or just interested in the domain.
So, why waste time? Let us dive into understanding financial reporting and its importance in the real world.
What is Financial Reporting?
Financial reporting is a standardised accounting practice that involves a financial statement that informs about the company’s financial information and performance over a particular period, usually on an annual or quarterly basis.
Through this report, the business owner along with the stakeholders and investors of the company get detailed financial data to understand the health of the business. According to this, they strategise and decide their next plan of action.
This comprehensive documentation typically includes financial statements such as a balance sheet, profit & loss statement, cash flow statement, and statement of shareholders’ equity. Along with this, there are other financial documents as well. For example, shareholders’ annual reports, stocks and securities records, and the footnotes to financial statements.
As a business expands, the importance of reliable financial reporting becomes indispensable for fostering trust, facilitating investment, and enabling informed economic decisions.
Understanding the Essentials of Financial Reporting
As we discussed above, there are several essential components to financial reporting. Each one of those statements informs about different aspects of a company’s finances. Understanding all of them is crucial for anyone in management accounting.
In this document, one can find the disclosure of the company’s assets, liabilities, and shareholders' equity of a specific time period. This portrays the financial position of the company.
Profit & Loss Statement (Income Statement)
As the name suggests, this financial document displays the revenues, expenses, gains and losses incurred over a period. This summarises the financial activities of the company in that particular time. Also, shows if the company is profitable or not.
Cash Flow Statement
This document is specific to the cash transactions, detailing its inflows and outflows. It is categorised into operating, investing, and financing activities, providing insights into the company's liquidity and solvency.
Notes to Financial Statements
These are supplementary disclosures that offer additional explanations about items presented in the financial statements. Through this, one can be informed about the accounting policies, contingent liabilities, and other relevant information.
Statement of Retained Earnings
This section shows the retained earnings of the business i.e., the net income that is retained or reinvested in the business after paying out dividends to the shareholders. It provides insights into the company’s ability to generate profits and reinvest in the business.
This report is conducted by external auditors to assess the fairness and accuracy of the financial statements. It assures stakeholders that the financial information presented is reliable and adheres to accounting standards.
Why is Financial Reporting Important?
Finance is the cornerstone of any business without which it cannot run its operations. This establishes its importance and also points to the significance of its reporting at regular intervals. Below are some crucial points shedding light on the importance of financial reports for an organisation.
Transparency and Accountability to Stakeholders
Reliable financial reporting builds trust among investors, creditors, employees, and the public by providing a clear and truthful depiction of a company's financial health and performance.
As a result, this transparency fosters credibility and enhances confidence in the organisation's operations and management.
Facilitate Informed Decision Making
An accurate financial report lets the business owner along with investors and stakeholders have a closer look at the financial health of the business. It allows the management to identify trends and potential roadblocks to actively track their financial performance in real-time. Based on these, they make quick and sound financial decisions for the business.
Compliance with Regulatory Standards
A financial report of a company is made with adherence to regulatory standards such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). This ensures that the business is compliant with the laws and regulations required by government agencies, safeguarding the company from any legal and reputational risks.
Furthermore, compliance ensures uniformity and consistency in financial reporting practices, enabling comparability among different entities and fostering trust in the reliability of reported financial data.
The financial statements included in the report disclose the company’s current assets and liabilities, giving insight into its outstanding debts as well. With a thorough understanding of the financial statement, one can easily manage the organisation’s debt.
Challenges and Risks
There is no doubt that financial reporting is an indispensable part of a business. However, in its process, multiple challenges impact the accuracy and reliability of the reported information.
In multinational businesses, the diverse regulatory frameworks and operational structures across different countries create complexities for the corporation.
Another hurdle that many businesses come across is accounting for intangible assets and intellectual properties as their value often relies on estimations. This leads to potential discrepancies in financial statements.
Presenting the entire financial report on time with the utmost accuracy is not an easy task. Companies look for financial accounting or management accounting professionals for this task. This is also because of the need for a reliable financial report that meets the regulatory guidelines. Any fraudulent practices, such as intentional manipulation of financial data pose severe threats to credibility along with legal consequences.
All in all, a financial report is the reflection of a business’s operations, keeping its finances in the centre. Even though it seems like the report is prepared for the management, it extends its influence beyond investors to stakeholders at large. And it’s quite vital to accurately present the financial statements in the report along with its other components. For this, a professional with an ACCA course is the best choice.
Taking up Imarticus Learning’s Association of Chartered Certified Accountants, UK can unlock global opportunities for you in accounting and finance. This global CA certification provides you with an advanced skill to stand out and create a difference.