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

Financial reporting is done quarterly and annually by businesses. The financial positions of the companies are shown in these reports.

For the general public, these reports are referred to as financial statements, and they provide an overview of whether an investor will benefit from investing in a company or will lose money if they do not.

So, if you can manage your finances, you’ll be able to generate the upcoming financial reports.

What is Financial Reporting?

Financial reporting is the process of communicating a company’s entire financial information, such as financial statements, to the financial statement’s users, such as investors and creditors. Companies that issue financial statements are commonly considered to indicate financial capability. It informs creditors and public officials about the company’s profitability and financial stability.

This was designed to assist any organization keep track of its financial transactions and forecasting future requirements. It is the process of reporting all accounting-related data to the users or groups of users.

There are two types of reporting:

1. Made for Investors

In the reporting of the finances, companies can describe all the resources through which they increase their revenues and spend the money. Throughout the financial statement investors easily make their decisions about investing in the companies. 

2. For calculating the profits and loss

Financial reporting not only helps the investors but through the help of the reports the companies can measure their profits. Also, by properly analyzing the reports the businesses can design attractive techniques through which they can approach several new clients. 

Recommended for you: WHAT IS FINANCIAL PLANNING? OBJECTIVES & COMPONENTS OF A SUCCESSFUL FINANCIAL PLAN

What is Involved in Financial Reporting?

Financial reports help organizations and investors in making critical choices. The question now is, which details are included in the reporting? Then, in financial reporting, the following details are included.

  • All financial statements, including the income statement, the gross income statement, the balance sheet, the statement of cash flow, the statement of medicinal flows, and the statement of stockholders’ equity, etc.

  • Retained earnings – a sign that the business has done well and is reinvesting its profits back into the business.

  • Accountant’s report – This report details how completely the financial statements were examined.

  • The prospects for the issue of ordinary shares and other investments.

  • Any information on quarterly revenue earned from a press release or conference call.

  • Involved the details regarding quarterly and annual reports of the cost of the security and exchange commission. 

Types of Financial Reporting

There are several types of financial reporting.

1. Balance Sheet

A balance sheet is a statistical document that shows the assets, liabilities, and equity balances. The balance sheet is the most fundamental accounting equation. This chart is updated regularly because the balance can change every day. As a result, this sheet is shown at the end of a specific date. This sheet will be updated until the end of the financial year when you submit the financial report.

2. Income Report

The report of incomes and expenses for a given period is known as an income statement. The income statement is different from the balance sheet in that it is prepared for a specific time, such as a week, month, or year. Deducting the costs involved, income from various sources can be calculated. 

3. Statement of cash flows

Maintaining the cash flow positively is important for the companies. Statement of cash flows shows the influx and outflow of characteristics experienced by the company over the time under consideration. Operating activities, investing activities, and financing activities are the three classifications of cash flow. This statement usually shows how much money was made and spent over a specific time.

4. Equity Shareholder Reports

This financial reporting makes an important impact on the companies’ profits. The statement of shareholder’s equity considers the capital investment made by investors as well as the earnings maintained by the company as a result of that investment. This statement, like the balance sheet, is presented on a specific day. As a result, it is restricted by time.

Objectives of Financial Reporting

Every organization needs to know the results of its performance to move forward and plan for the future. It wants to know where it stands financially after a specific amount of time has passed. A business usually stabilizes after a year and requires forecasting.

The financial report is essential in this case. It not only shows the economic situation clearly, but it also leads to future decision-making. It displays the accounts as of the last date, which is the financial year’s conclusion, and it displays the balances for future business investments using the balance sheet.

For making the economic reports the main objective for the businesses is to show the financial position of the companies to the market. 

  • The statement provides information about the investments and credits deals

  • All the detailed details of the cash flow in the market

  • Information about economic resources like shares, investors, other financial claims, etc

  • The purpose behind providing the financial statement is to give the information to the public and approach the trust of the investors. 

Benefits 

There are several benefits of making financial reports. 

  • Through analyzing the statement the companies can manage their whole debts. 

  • While managing their loan and credits businesses can manage their liabilities. 

  • Balance Sheets help the companies to develop strategies that approach several new consumers. 

  • Businesses can identify the trends and through past sales, they can forecast future sales. 

  • By available capital in the companies, they can make the appropriate plan to increase their product awareness in the competitive market. 

  • Also, healthy economic statements help the companies to maintain consistency in their relationship with the consumers. 

  • Even they can maintain the trust of the investors or shareholders. 

In short, economic statements help the companies to grow in the market while maximizing their profits and maintaining the trust of the consumers and investors. 

Limitations 

Every product has an expiration date, every person has an age limit, and financial reporting has some limitations.

1. Only show the historical data

Only historical data is shown in financial reports. Investors are not easily projecting the future position of the companies in the statement.

Investors and shareholders are more concerned with the future market. As a result, they are more interested in studying current company positions and investing in current market conditions. So, this is the limitation of the economic statement. 

2. Financial Reporting are tools 

Companies can examine their sales market and develop their sales strategies using sales reports; they can deliver the best service to their customers using customer reports, and they can maintain their costs using purchase reports. All of these reports, in turn, enable the company in determining the best way to maximize profits.

Financial reports, on the other hand, only explain a company’s economic situation. While analyzing, companies are unable to find a solution to the negative reports. Even though it is one of the best measurement tools available, it is never able to provide a solution.

3. Not considering the qualitative aspects

Only numbers are shown in financial reports. It does not take human resources into account in the accounting process. It disregards its employees’ efficiency, technical know-how, and profitability. As a result, it does not act for the qualitative aspects of the business.

4. Intangible assets are not considered.

Intangible assets, such as the creation of a brand image, are considered in economic reporting. Intangible assets, on the other hand, are not considered assets. As a result, the actual reports differ significantly from the prepared statements.

Also Read: HOW TO CHOOSE THE RIGHT ACCOUNTING SOFTWARE FOR YOUR BUSINESS?

Conclusion 

Various financial statements focus on various aspects of monetary success. The financial reporting of a firm includes a variety of monetary data that investors and creditors use to assess the company’s economic performance. 

Financial reports are particularly significant for corporate executives since they allow them to communicate with interested parties about their continued success outside of the company by publishing monetary figures. With the help of Accounting software making monetary reports is becoming an easy task for businesses. 

For a free demo of Gross Accounting Software, please contact us.

Leave a Reply

Your email address will not be published.

18 + 15 =