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Financial Reporting

What is Financial Reporting?

Financial reporting is the disclosing of financial data, by using statements, to indicate the financial situation of a company over a time period, usually on an annually or quarterly basis. The report is essential for management to make decisions about the future of the company and it offers information to capital providers, such as creditors and investors, about the potential profitability and financial stability of the company.

What does a Financial Report contain?

There are four type of financial statements which are found in a financial report: income statements, balance sheets, a statement of retained earnings, and cash flow statements.

1. Income statement: summarizes the company’s revenue, expenses and profits and is sometimes called a profit and loss statement. It essentially depicts how much the business has gained and lost over a certain time period and determines a company’s net income.

2. Balance sheet: an overview of a company’s assets, liabilities and stockholders’ equity at a single point in time.

3. Statement of retained earnings: statement of a company’s changes in equity during a standard accounting period.

4. Cash flow statement: depicts the amount of cash entering and leaving the business. It gives stakeholders an indication of the business’ operations as well as how it repays debt and funds current and future expenses.

Whilst these are the four principle financial statements included in a financial report, any financial communication, document, or information that is available to the public can be included in a company’s financial report.

What is the purpose of a Financial Report?

Reading a Financial Report is the best way to understand how well a company is performing from a fiscal perspective. In addition to being crucial for investors to assess a business’s financial stability, Financial Reports are required by law for taxes and standard accounting practices. Here are some other important reasons financial reporting can benefit a business:

Firstly, it helps management to make better financial decisions by identifying trends, problems, and easily tracking performance. When the time comes to make a quick but important economic decision, a financial report will provide a great foundation on which to base the decision.

Secondly, they give managers an indication on how to manage debt by offering clear information about the financial status of the company.

Thirdly, Financial Reports make tax paying simpler. Financial reports are a legal requirement and so having these accurate reports mitigates the risk of error and saves time when filing out your company’s taxes.

Fourthly, financial reporting guarantees your company’s compliance with the law and regulations required by government agencies, for example the IRS.

Fifthly, Financial Reports exemplifies your company’s integrity and ability to build trust with potential investors and creditors.

For more on Financial Reporting:

What is Financial Reporting

The Importance of Financial Reporting and Analysis

European Comission on Financial Reporting

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