What is Financial Reporting?
The reports determine business assets, liabilitiesLiabilitiesLiability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company.read more, cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more, profitabilityProfitabilityProfitability refers to a company’s ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company’s performance.read more, and shareholders’ equity. Financial reports are standardized by two prominent frameworks—The Generally Accepted Accounting Principles (GAAP)Generally Accepted Accounting Principles (GAAP)GAAP (Generally Accepted Accounting Principles) are standardized guidelines for accounting and financial reporting.read more and The International Financial Reporting Standards (IFRS)International Financial Reporting Standards (IFRS)IFRS or International Financial Reporting Standards refers to a globally-accepted set of accounting and financial reporting guidelines for preparing and presenting financial statements. It ensures uniformity in accounting practice that makes financial records comparable across different reporting entities worldwide. Over the years, it has emerged as the new world standard in accounting.read more.
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Key Takeaways
- Financial reporting and analysis is the recording of financial information in the books of accounts. It reveals a company’s true financial position. Financial reports include financial statements, notes to accounts, director’s reports, auditors’ reports, corporate governance reports, and prospectus. These reports are crucial for strategizing the future growth and sustainability of a firm. While formulating it, analysts focus on readability, clarity, precision, consistency, reliability, transparency, relevance, and comprehensiveness.
Understanding Financial Reporting
Financial reporting and analysis is the representation of financial transactions in the books of accounts. These reports provide insight for investors and creditorsCreditorsA creditor refers to a party involving an individual, institution, or the government that extends credit or lends goods, property, services, or money to another party known as a debtor. The credit made through a legal contract guarantees repayment within a specified period as mutually agreed upon by both parties. read more. Financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more reflect a company’s financial health. The reports are crucial as they become the basis for decision-making.
When it comes to financial requirements and regulations, there are mainly two frameworks — GAAP and IFRS. GAAP lists reporting guidelines for US-based public and private companiesPublic And Private CompaniesPublic companies and private companies both can be huge. It’s just the way they source funds are different. The public company takes the help of the general public and loses out on the ownership, and they need to adhere to the regulations of SEC. The private company takes the help of private investors and Venture Capital. And they don’t need to disclose any company information to the general public.read more. The IRFS, on the other hand, has established a universally accepted standard for formulating such reports—followed by international companies.
Types of Financial Reporting
Given below are its different reporting methods:
#1 – Financial Statement
This includes balance sheetsBalance SheetsA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more, income statementsIncome StatementsThe income statement is one of the company’s financial reports that summarizes all of the company’s revenues and expenses over time in order to determine the company’s profit or loss and measure its business activity over time based on user requirements.read more, cash flow statementsCash Flow StatementsA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read more, and the statement of shareholders’ equityShareholders’ EquityShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders’ Equity Statement on the balance sheet details the change in the value of shareholder’s equity from the beginning to the end of an accounting period.read more. In addition, some companies with two or more units may have both standalone and consolidated financial statements. The statements reflect a firm’s business performance.
#2 – Director’s Report
In larger companies, the Board of DirectorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more releases a report stating annual returnsAnnual ReturnsThe annual return is the income generated on an investment during a year as a percentage of the capital invested and is calculated using the geometric average. This return provides details about the compounded return earned yearly and compares the returns supplied by various investments like stocks, bonds, derivatives, mutual funds, etc.read more, board meetings, loans, investments, corporate affairs, highlights, and achievements. If a firm performs lousily, this report points out the cause behind underperformance.
#3 – Management Discussion and Analysis
Financial reporting and analysis provide information on the current position and performance of a company—in comparison to the competition. In addition, the report focuses on industry trends, future strategies, and future opportunities.
#4 – Notes to Accounts
It is mentioned as a footnote and informs about methods and accounting policiesAccounting PoliciesAccounting policies refer to the framework or procedure followed by the management for bookkeeping and preparation of the financial statements. It involves accounting methods and practices determined at the corporate level.read more used by a company.
#5 – Auditors’ Report
This report contains the independent opinion of the statutory auditor. It is the auditors who take the company’s financials and accounting principles.
#6 – Corporate Governance Report
The report catalogs the composition of the board of directors, directors’ profiles, remuneration Remuneration Remuneration refers to overall monetary and non-monetary compensation that employees or independent contractors receive for providing services to an organization or company.read morepaid to top management, and compliance with statutory regulations. It is a communication between the board of directors, management, shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company’s total shares.read more, and the creditors.
#7 – Prospectus
A company planning to issue an IPO releases a prospectus to promote the securities. It contains all the information about the company’s financials, operations, management, and business goals.
Purpose
Financial reports mirror business performance in terms of numerical figures. It aims to fulfill the following goals:
- Periodic Record Maintenance: All the financial transactions in a particular period is recorded in the company’s financial statements.Financial Ratio Analysis: Financial reports are used to evaluate company financial ratiosFinancial RatiosFinancial ratios are indications of a company’s financial performance. There are several forms of financial ratios that indicate the company’s results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on.read more.Tax Purpose: Financial accounts and reports are formulated in accordance with Internal Revenue Service (IRS). This helps firms in filing tax returns.Reveal Company’s Financial Condition: Investors, creditors, bankers, the public, regulatory agencies, and the government rely on financial data for decision-making.Disclose Future Strategies: Managements chart strategic roadmaps for the future of their companies. During economic slumps, the roadmap alleviates investor concerns by revealing strategies that can improve corporate position.Clear Internal Vision: In accounting, internal reporting is used by some companies to keep employees informed of operations and economic position.Statutory Compliance: Organizations are required to file reports with various agencies like ROC, government, and stock exchanges—on a quarterly or annual basis. Businesses are subject to statutory auditsStatutory AuditsOne of the most common types of audits is the statutory or financial audit. Its main purpose is to gather all relevant information so that the auditor may provide an accurate and unbiased assessment of the company’s financial position.read more.Brings Transparency: Financial reports reveal how a company utilizes resources.
Examples
Let us see some financial reporting and analysis examples. Given below are financial statements of Verizon Communication Inc., for the year ending on December 31, 2020:
Income Statement:
Balance Sheet:
Cash Flow Statement:
Statement of Change in Equity:
Financial Reporting Video
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