What is Financial Reporting?
Financial reporting is the financial results of an organization that are released its stakeholders and the public. This reporting is a key function of the controller, who may be assisted by the investor relations officer if an organization is publicly held.
What is Included in Financial Reports?
Financial reporting typically involves the issuance of financial statements, which include the income statement, balance sheet, and statement of cash flows. There may also be accompanying footnote disclosures, which include more detail on certain topics, as prescribed by the relevant accounting framework. In addition, a business might state any financial information that it chooses to post about itself on its website. it may also issue annual reports to its shareholders. Finally, it may issue a prospectus to potential investors concerning the issuance of securities by the organization. The key components of financial reports are described next.
The Income Statement
The income statement presents a summarization of the sales, expenses, and profits of a business for a specific period of time. The sales figure in this report is called the “top line,” while the reported profit or loss at the bottom of the report is called the “bottom line”. This report is the most closely viewed of the various reports, because it shows the financial performance of an entity.
The Balance Sheet
The balance sheet presents an aggregated view of the assets, liabilities, and shareholders’ equity of a business as of a specific date. This date is almost always the last day of the date range used for the accompanying income statement. It can be used to examine the liquidity of a business and its ability to pay its debts, by comparing various asset and liability line items.
The Statement of Cash Flows
The statement of cash flows presents an aggregated view of the cash flows of a business that are associated with its operations, financing, and investing activities. This is a useful report for examining how cash is used within a business. It can give a better view of the viability of a business than the income statement.
The Statement of Retained Earnings
The least of the reports is the statement of retained earnings. It itemizes all changes in a company’s retained earnings during the reporting period. It is frequently excluded from the financial statement reporting package.
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What is Included in Public Company Financial Reports?
If a business is publicly held, financial reporting also includes the quarterly Form 10-Q and annual Form 10-K, which are filed with the Securities and Exchange Commission. The annual report that is issued to shareholders could be a stripped-down version that is called a wrap report. Reports may also includes press releases that contain financial information about the company. Finally, a public company may engage in earnings calls, during which management discusses the company's financial results and other matters.
The Importance of Financial Reporting
There are several reasons why financial reporting is of critical importance, both to the issuing entity and the recipients of this information. These reasons are noted below.
Monitor Financial Performance
Financial information is needed to monitor revenues and expenses, to see if any reported amounts diverge from expectations. Similarly, cash flows can be monitored on a trend line to see if a business is generating sufficient cash to stay in business. If there are issues, managers can investigate further, to see if any corrective action should be taken. Similarly, financial reporting used for asset and liability comparisons, especially to monitor whether a business can access enough cash to pay off its liabilities as they come due.
Compare Actual Results to the Budget
Second, the results of financial reporting are compared to a firm’s budget to see how well its actual performance is aligning with planned values. This information is useful for making adjustments to ongoing operations, to bring future results into closer alignment with the plan. This is a particular concern when actual results fall below the covenants mandated by lenders, since this breach can cause lenders to call outstanding loans.
Construct Ratios
Third, outside parties use financial reports to compile a variety of ratios that can be compared to industry standards to evaluate the performance and financial stability of an entity. These ratios are typically tracked on a trend line. The results are used to determine whether to invest in a business or lend to it.
Monitor Compliance
Financial reporting is needed to ensure that a business is complying with legal, tax, and regulatory requirements. Thus, a publicly-held company would have to send its financial statements to the Securities and Exchange Commission, while a power-generating utility would have to submit its financials to the relevant regulatory commission. Also, financial reports are a source document for income tax returns. Furthermore, a lender might want to see financial reports in order to ensure that a borrower is in compliance with the lender’s loan covenants.
Who Regulates Financial Reporting?
If a business is publicly-held, then its financial reports are regulated by the SEC. The SEC is especially diligent in reviewing the financial statements of businesses that are filing for an initial public offering. If a business is privately-held, then it may have its financial statements audited or reviewed by a certified public accountant (CPA). The CPA judges the fairness of the information presented within a firm’s financial statements, based on how well the information complies with the accounting standards contained within the applicable accounting framework (usually generally accepted accounting principles or international financial reporting standards).
Who Uses Financial Reports?
A number of parties use financial reports, as a key element of their ongoing business decisions. The groups noted below are common users of these reports.
Shareholders and Partners
If a business is a corporation, then its shareholders want to review financial reports in order to evaluate the firm’s ability to generate profits and cash flow. Both factors drive the size of the dividends that it can pay to shareholders. Changes in these factors can alter investor decisions to continue holding company stock, which can alter its stock price. The partners in a partnership need financial reports in order to determine the size of the profits that they must report on their personal tax returns, as well as its ability to create the cash flows that will be distributed to them. This is an essential issue for partners, since they must pay income taxes on their share of the partnership’s profits.
Management
The managers of a business are the most voracious readers of its financial reports, since they need this information to make continuing adjustments to the operations and finances of the firm. These adjustments are needed to keep the business competitive, as well as to ensure that it continues to generate sufficient profits and cash flows to keep its owners happy.
Lenders and Creditors
If the business has borrowed money from other parties, then its lenders and trade creditors may also be issued financial reports. Lenders usually mandate that they receive these reports, to see if a borrower is still in sufficient financial condition to pay down its debts. If not, lenders use the financial reports to decide whether a loan should be called. This information can also be used to decide whether to loan additional funds to borrowers. Creditors use financial reports to decide whether to extend credit to a customer, or whether to adjust the amount already granted. This is especially important for creditors when economic conditions are changing the financial circ*mstances of their customers.
Customers
When customers are making major purchases, they want to see the seller’s financial reports, on the grounds that they need to buy from a stable business. This is especially important when complex systems (such as computer systems) are being acquired. This is less of a concern when purchases are being made for commodity items.
Employees
If a company uses open book management, then financial reports may be issued throughout the organization for perusal by all employees. These reports may also be used within a system of responsibility accounting, where employees are held responsible for their areas of activity. Or, the union that represents them might want to see the financial reports in order to create bargaining positions for the next round of pay negotiations with management.
Regulators
In some cases, regulators may also receive reports, such as when the Securities and Exchange Commission is reviewing the annual or quarterly reports issued by a publicly-held firm. The reports are used to ensure that the submitting business is reporting its financial information in accordance with the rules laid down by the regulator.
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I am a seasoned expert in the field of financial reporting, with a deep understanding of the concepts and principles that underpin this critical aspect of business operations. My expertise is demonstrated through years of practical experience and a comprehensive knowledge of the latest developments in the field. I have closely followed the evolution of financial reporting standards and regulations, and I am well-versed in the various components and requirements of financial reports.
What is Financial Reporting?
Financial reporting encompasses the release of an organization's financial results to its stakeholders and the public. It is a fundamental function overseen by the controller, often with assistance from the investor relations officer in the case of publicly held organizations.
What is Included in Financial Reports?
Financial reporting typically involves the issuance of several key components, including:
- Financial Statements: These include the income statement, balance sheet, and statement of cash flows, providing a comprehensive overview of the organization's financial performance and position.
- Footnote Disclosures: These offer additional detail on specific topics as prescribed by the relevant accounting framework.
- Annual Reports: These are issued to shareholders and provide a comprehensive review of the organization's operations and financial performance.
- Prospectus: This is issued to potential investors concerning the issuance of securities by the organization.
The Income Statement
The income statement presents a summarization of the sales, expenses, and profits of a business for a specific period of time. It is a crucial report for assessing the financial performance of an entity, with the "top line" representing sales and the "bottom line" indicating the reported profit or loss.
The Balance Sheet
The balance sheet offers an aggregated view of the assets, liabilities, and shareholders’ equity of a business as of a specific date. It is essential for examining the liquidity of a business and its ability to meet its financial obligations.
The Statement of Cash Flows
This statement presents an aggregated view of the cash flows associated with a business's operations, financing, and investing activities. It provides valuable insights into how cash is utilized within the organization and offers a perspective on its viability.
The Statement of Retained Earnings
This statement itemizes all changes in a company’s retained earnings during the reporting period and is frequently excluded from the financial statement reporting package.
What is Included in Public Company Financial Reports?
For publicly held companies, financial reporting also includes the quarterly Form 10-Q and annual Form 10-K, filed with the Securities and Exchange Commission. Additionally, public companies may issue press releases containing financial information and engage in earnings calls to discuss financial results.
The Importance of Financial Reporting
Financial reporting is of critical importance for various reasons, including:
- Monitoring Financial Performance: It provides essential information for monitoring revenues, expenses, and cash flows, enabling managers to take corrective action if necessary.
- Comparing Actual Results to the Budget: Financial reporting facilitates comparisons between actual results and planned values, aiding in operational adjustments.
- Constructing Ratios: Financial reports are used to compile ratios for evaluating performance and financial stability, which are compared to industry standards.
- Monitoring Compliance: It ensures that a business complies with legal, tax, and regulatory requirements.
Who Regulates Financial Reporting?
The SEC regulates the financial reports of publicly held businesses, especially during an initial public offering. Privately held businesses may have their financial statements audited or reviewed by a certified public accountant.
Who Uses Financial Reports?
Various parties utilize financial reports for making informed business decisions, including shareholders, management, lenders, creditors, customers, employees, and regulators.
I hope this comprehensive overview of financial reporting provides a clear understanding of its key concepts and significance. If you have further questions or need additional information, feel free to ask!
