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What is Financial Reporting? Types, Objectives, Benefits, and Limitations

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Financial reporting is an essential process to manage, organize & understand your company’s finances. A financial report in any company is used by a wide variety of people during the financial year to evaluate the financial status, performance, and changes of any entity. It also helps readers make a better-informed decision about the entity as well as their behavior.

You know that your employees need these reports in collective bargaining agreements with management, in the case of labor unions, or in discussing their compensation, promotions, and rankings for individuals. In today’s era, there are many accounting software, so that you can easily keep all accounting records of your business. And also with the help of accounting software, you can easily get all the financial reports of your business.

# What Is Financial Reporting?    

Financial reporting refers to the communication of complete financial information of a company like financial statements, to the users of the financial statements such as investors and creditors. Financial capabilities are usually seen as companies issuing financial statements. It provides information about the profitability and financial stability of the company to creditors and officials.

# What is Involved in Financial Reporting?

It processes the creation of a financial statement that helps the management, creditors, investors, and government, etc. to ascertain the financial condition of the business. Financial reporting includes the following:

  • All financial statements such as income statement, comprehensive income statement, balance sheet, cash flow statement, statement of medicinal flows and statement of stockholders’ equity, etc.
  • Retained earnings – a sign that the company has done well and is reinvesting its profits in itself.
  • Accountant’s report – This report informs about how much scrutiny has been applied to the financial statements.
  • Prospects related to the issue of common stock and other securities.
  • Any information through a press release or conference calls regarding quarterly income.
  • Reports to government agencies, including quarterly and annual reports of the Securities and Exchange Commission.

# Types of Financial Reporting

  1. Balance Sheet: A balance sheet is a financial statement that reports a company’s financial condition, its assets, liabilities, and owner’s equity at any given time.
  2. Profit and Loss Report: The P&L report is also known as the income statement. This report shows you the financial performance of an organization for the entire reporting period. This financial statement produces a report on the company’s expenses, revenue, and net loss or income over a given period.
  3. Cash Flow Statement: This reveals the inflow and outflow of characteristics experienced by the organization during the reported period. Cash flow is divided into three classifications – the first is operating activities, the second is investing activities and the third is financing activities. This statement usually reports on cash generated and spent over a certain period.
  4. Statement of Changes in Equity: This financial statement reports on the change in retained earnings of your company after the dividend was issued to the stockholder and is an important aspect of financial reporting that contributes to the stock price.

# Objectives of Financial Reporting

The following points sum up the objectives & purposes of financial reporting :

  • The purpose of financial reporting is to provide all financial information about the reporting entity that is useful in making useful resources and decisions about providing resources to the potential investor, lender, and other creditor entity.
  • Those decisions include buying, selling, or holding equity and debt instruments and providing or settling debt and other forms of credit
  • Many current and potential investors, lenders, and other creditors may not require reporting entities to provide direct information and must rely on general purpose financial reports for too much financial information.
  • Providing information about how an organization is purchasing and using various resources.
  • Consequently, it is the primary step to whom general purpose financial reports are directed.

# Importance 

  • Its purpose is to comply with the organization and comply with various statutes and computer requirements. ROCs, government agencies require organizations to file financial statements. In the case of listing companies, quarterly as well as annual results should be recorded and published on the stock exchanges.
  • It also facilitates statutory audit. But statutory auditors are required to audit the financial statements of an organization to express their opinions.
  • Financial reports form the backbone for all financial planning, analysis, benchmarking, and decision making. It is used by various stakeholders for the above purposes.
  • Financial reporting helps organizations to raise capital from domestic as well as abroad.
  • Based on financials, one can analyze the performance of a large-scale public organization as well as its management.
  • Forbidding, labor contracts, government supplies, etc., organizations are required to submit their financial reports and similar.
  • Financial statements give business owners and management direct insight into their company’s current assets and liabilities.

# Benefits 

Here are 2 benefits of  financial reporting:

  • Financial statements are decision-making tools. They are points that show a trading trend and a trend that shows how an enterprise is collecting revenue and the rate at which creditors are being paid. They will also exhibit any irregularities that may be hindering the cash flow of your enterprise.
  • A company provides a product or service, sells to its customer, collects money and the process is repeated. Financial management is moving cash efficiently through this cycle. This means managing the turnover ratio of raw materials and finished goods inventories, selling to customers and collecting receipts on a timely basis, and initiating the purchase of more raw materials.

# Limitations 

These are some limitations of financial reporting:

  • General-purpose financial reports do not provide all information to existing and potential investors, borrowers, and other creditors.
  • Therefore those users need to consider relevant information from other sources.
  • In addition to officers, borrowers, and other creditors, such as members and members of the public, finance can also be useful for common tasks. However, those formats are not explicitly directed to these other groups.
  • Information often comes from approximate measures based on assumed assumptions.

# Conclusion

Different financial statements focus on different areas of financial performance. A company’s financial report provides various financial information that investors and creditors use to evaluate the company’s financial performance. Financial reports are also important for company managers because by publishing financial statements, management can communicate with interested parties about their ongoing achievement outside the company.

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