Learn How to Properly Proceed with Financial Reporting 

If you have recently started your company and are unsure of the process to smoothly do the first financial reporting then you need to learn about Financial Reporting with us. We will make you understand in bits and pieces about Financial Reporting so that you can easily perform it and error-free. 

What is Financial Reporting?

As the name stands for, Financial Reporting is a process of releasing the financial reports of the year to the general public. There are many reasons for which businesses may choose to opt for Financial Reporting instead of Financial Statements (the difference between them have been discussed in further detail below). 

Financial Reporting is a broader term as it encompasses not only the released financial accounts of the firm but also other components for instance the details about the business, directors, creditors, investors, government authorities, etc.  

Inclusions in the Financial Reporting

Finacial Reportings acts as the face of the organisation because it is the report card of the hard work of the CEO and CFO of the organisation. Therefore, it should cover all the major grounds of the finances ranging from:

• Financial Statements
• Annual Report
• Notes to the Financial Statements
• Merger, Demerger, and Acquisitions
• All other filings 

Reasons for Preparing the Financial Reporting

There are broadly two reasons for releasing and preparing the Financial Reporting and these are as follows:

Prescribed by Law

The first and foremost reason for preparing the Financial Reporting is that as per the Accounting Associations accounting is a process of identifying, and communicating the economic information of the organisation to the users so that they can make informed decisions based on the drafted financial reports. This is the reason that makes it obligatory for companies to disclose their financial statements. It is also imperative that the directors should also release the quarterly financial reports and performance of the organisation to let the users use their qualified judgments and make informed decisions. 

Disclosure by the organisations on Voluntary Basis

Organisations choose financial reporting by themselves and the reasons for choosing these disclosures are as follows: 

• Market Forces: Organisations that regularly disclose their financial reports to the public attract more investors. Even the organisations that make more than the regular disclosures are preferred over the normal disclosure organisations and for this reason it helps in attracting more investors on board with lesser costs. 

• Enhancement in the Reputation: By making more disclosures there is a relative enhancement in the reputation of the managers because it directly gives them and their team a sense of accomplishment. This is the reason that induces the management to release more financial reporting. 

• Corporate Governance: In the corporate governance era consumers always choose an organisation that is more vigilant and makes more informed decisions for their clients. This gives a boost to the organisations to make and prepare financial reporting. 

Therefore, there are broadly two reasons for preparing the Financial Reporting i.e. in the purview of the Accounting Standards, and the Voluntary disclosures chosen by the organisation. 

Objectives behind Financial Reporting 

Apart from the primary reasons for choosing the Financial Reporting option, there are various secondary reasons and objectives for choosing Financial Reporting by the organisations and these are as follows:

• Financial Status of the Organisation: As we have discussed the primary objective of releasing the financial reporting is to make the general public aware of the financial performance of the organisation in consonance with the applicable accounting rules and regulations.

• Details of the Assets and Liabilities: The other important perk of preparing the Financial Reporting is to release the yearly assets and liabilities of the organisation in consonance with the applicable accounting rules and regulations.

• Details of the Cash Flow: Financial Reporting enables the operating, investing, and financial activities of the organisation to be released. 

• Rational Information: Financial Reporting acts as a rational information tool for investors and creditors to use their judgment and skills to make informed decisions regarding investment and other credit decisions. 

• Compliances: By releasing its Financial Reporting an organisation fulfils its responsibilities required to be performed under different rules and regulations. 

• Releasing Forecast: Financial Reporting helps organisations to release the quarterly and annual forecasts of the business. 

• Debt Management: By releasing the Financial Reporting the debts of the organisations are also released which acts as a warning or alert to the organisation to manage and repay them without hindering any assets of the organisation. 
• Filing of the Taxes: Financial Reporting is done in such a manner as to guide the organisation to file their annual taxes and returns to the government authorities. 

• Releasing Environment, Social, and Governance Information: It deals with the works of the company not just related to their core activities but also to other ancillary activities that keep them going in the long run. These activities run from employee well-being, child labour, climate change, work ethics, etc. 

• Manager Abilities: Financial Reporting is used as a tool to understand the ability of the manager to manage their business and look after the performance of their team.

This list of these objectives is not exhaustive because the need for preparing and releasing the Financial Reporting depends totally upon the need and position of the organisation depends on a case-to-case basis. 

Who uses Financial Reporting?

Financial Reporting is not only beneficial to the organisation but to other individuals as well. Other persons on the list also seek to have the best Financial Reporting and these are as follows:

• Investors, Lenders, and Shareholders: Investors, and Shareholders want to assess the finances of the organisation to check their growth potential and return on investments. The Lenders want to assess the financial condition of the organisation to look for the position of the organisation and their ability to return the loan amount borrowed. 

• Employees: Employees are the major asset of the organisation and this is the reason they want to know the exact position of the organisation where they are working and their growth prospectus with the organisation thereby enabling them to make informed decisions. 

• Customers: Organisations use financial reporting to let their customers or consumers know the worth of the business, donations, investment activities, and thereby enabling the customers to make informed decisions as to which supplier they should choose from. 

• Managers: Managers are the backbone of organisations and Managers use Financial Reporting to conclude the actual market condition and what strategies they may build to bridge the gaps. 

• Regulatory Institutions: The tax department always makes sure by using the Financial Reports to check if the organisation is complying with the taxation laws and filing their returns promptly. 

Importance of Financial Reporting

The main aim of financial reporting is to give insight into the business of the organization and allow people from different sectors to use these insights to avail the maximum benefits. The importance for different sectors is as:

• Identify the Trend: With the help of the Financial Reporting the business and market trends can be established so that the potential future risks can be avoided by the organisation. 

• Ensure Working Capital: With the help of Financial Reporting the organisations ensure that the working capital is apt for the organisation and the current liabilities are equal to the current assets. 

• Improve Business Partnership: As we have already discussed the help of Financial Reporting allows organizations to better understand the Financial position of the finance department so that a better plan to exaggerate and increase the revenues of the organization. 

• Ensure Transparency: With the help of Financial Reporting, the actual position of the organisation is being circulated which directly gives the investors a sense of accountability and transparency.

• Compliances: An organisation is required to fulfill alot of compliances in terms of Income Tax, Accounting Standards, and if the entity is a listed entity on a stock exchange then the principles of the Securities and Exchange Board of India are also required to be followed by the organisations. 

• Report on Cash Flow: The Financial Reporting gives the actual picture of the cash inflow and cash outflow in the organization as it will help in developing the future cash flow risks and preparing steps to mitigate the same. 

• Budget Drawn-up: Financial Reporting allows the organizations to draw up the budget for better planning of the future of the organisation. 

Purpose of Financial Reporting 

The purpose of Financial Reporting is to give the actual status of the finances of the organization to the investors, creditors, directors, owners, etc. The reason for letting them is to allow them to make more informed decisions regarding their investments, finances, cash inflow, and cash outflows. The main purpose of Financial Reporting is to give the actual status of:

• Expenditures
• Profits
• Revenues
• Capital and 
• Cashflow

What are the methods of Financial Reporting? 

There are 7 methods of Financial Reporting that an organisation may choose according to the needs of their business. These are as:

• Financial Statements: Financial Reporting and Financial Statements seem to be interchangeable words but in reality, they are not. Financial Reporting is a broader term and the Financial Statements cover balance sheets, shareholder’s equity, income statements, cash flow statements, etc. These statements jot down the real-time growth of the organisation. 

• Notes to Account: Notes to account are mentioned at the bottom as footnotes as they tell about the method and the accounting policies used by the organisation. 

• Directors Report: As the name implies it is a report prepared by the Board of Directors of the organisation which gives the idea about the annual returns, investments, loans, affairs, board meetings, and the organisation’s achievement. If the organisation does not perform well in a year then the reason for such underperformance is also quoted in the same report. 

• Auditor’s Report: In this method of Financial Reporting a report is prepared by the Auditors which is independent. Auditors are usually appointed to fulfil the need of the organisation to prepare the statutory audited accounts.

• Management  Discussion and Analysis: As the name of the method of  Financial Reporting implies in this method of Financial Reporting the actual growth of the organisation is analysed in light of future trends, growth, and prospective strategies. 

• Corporate Governance Report: Many big organisations have to fulfill their statutory criteria of corporate governance and this report focuses on the composition of the board of directors, remuneration being paid to the top-level management, etc. In a nutshell, it is the communication between the top-level management, creditors, and stakeholders. 

• Prospectus: When an organisation chooses to go public to obtain funds from the general public this situation is known as an Initial Public Offer and the organisations are required to release their prospectus before going for an IPO. A prospectus usually covers all the important information about the organisation, its financial obligations, operations, business, and management goals. 

Thus, these are the major methods of Financial Reporting which are opted for by organisations based on their needs. 

What are the types of Financial Reporting?

There are six types of Financial Reporting which can be chosen by the organisation and these types are as follows:

• Balance Sheet: A Balance Sheet as the name implies is a document that is prepared to count the assets and liabilities of the organisation. It is usually prepared at the end of the year. The idea behind preparing a balance sheet is to equal out all the assets, liabilities, and the stakeholder’s equity. 

• Income Statement: The Income statement refers to that document that is prepared to track the total income of the organisation. It takes into account the revenue, expenses, and net income of the organisation in a certain period. Expenses are bifurcated into two categories operating, and non-operating expenses. The major expenses incurred by an organisation are usually wages of the organisation, taxes, and electricity bills. The net income is calculated after deducting the revenue from the total expenses. 

• Cash Flow Statement: The statement which deals with the inflow and the outflow of the cash in the organisation for a given period. In simple words, it specifies from where the money comes and the money goes. A Cash Flow statement is divided into three- The first section of the report gives an idea about the inflow of cash by selling the goods, and services and the payment of the wages to the employees. 

The section tells about the cash inflow from the sale and purchase of the assets and withdrawal of the investments. The last section deals with the loans obtained from the banks and investors and then the sum obtained after repayment to the bank and dividing the remaining amount between investors.  

• Statement of Equity: This type of Financial Reporting includes the company’s equity in a defined period. It takes into account the issuance of shares, option exercises, dividends distributed to the shareholders, net earrings affecting the equity, buy-back details, and other financial statements not included in the income statement of the organisation.  

• Statement of Comprehensive Income: It is a statement of the comprehensive income which uses the method of standardizing the net income while continuously making changes to the comprehensive income of the organisation. Comprehensive Income is the losses or income that has not been revealed on the reported income statement of the organsation. 

• Non-Profit Financial Statements: As the name implies it is a statement prepared by non-profit organisations. Non-profit organisations are those organisations that do not run for profit making. 

What makes Financial Reporting accurate?

Until and unless a Financial Report is not accurate it will be futile to prepare it. An accurate Financial Report provides an ample amount of perks as we have already discussed the different categories of the individuals and the bodies. To make an error-free Financial Report the below-mentioned errors are required to be avoided. These are as:

• Up-to-date Data: The Financial Report is required to be made with the latest and most up-to-date real-time data as it will enable the organisations to prepare strategies accordingly to mitigate the future risk and excel at their full growth potential. 

• Digital Financial Reports: Using the manual Financial Reports in the 21st century is not an ideal deal. To make error-free and accurate Financial Reports the reports must be drafted with computer-based applications because they are very quick in comparison to manual reports which take long hours and there might be a possibility that the data becomes redundant by the time a manual report is prepared. 

• Choose the right type of Financial Reporting: By choosing the right type of Financial Reporting out of the available types to suit the best interests of your organisation is the key to error-free Financial Reporting. 

• Performance Analysis: With the use of accurate technology the performance of the organisation keeping the performance history, industry trend, and growth error-free and accurate Financial Reporting can be achieved. 

What are the limitations of Financial Reporting?

• Different Perogatives: Every investor shares a different prerogative and draws a different conclusion from the Financial Reporting making it difficult for them to come on the same page. Sometimes, it is also, possible due to the difference in opinions wrong decisions are taken. 

• Comparison of Multiple Periods: It is always advised to take the comparison of the Financial Reporting for different periods so that it will be easier to track the market progress of the organisation in light of the industry trend. 

• Forged Data: The financial reporting is prepared after taking into account the data fed to the system by the organisation. It is always possible that the fed data is misled or misused thereby resulting in making the data not reliable.  

Ten Use Cases of Financial Reporting 

The use of External Reporting is divided into Internal and External factors and these are as follows:

Internal Factors 

1. Financial Reporting helps the directors or the CEO of the organizations to make decisions regarding the expansion or reduction of the business.
2.  Financial Reporting helps the business to anticipate the business forecasts and develop budgets
3. To analyze the profitability of the business.
4. To analyze the cash flow rates or assess the burn rates for the start-up organisations. 

External Factors 

1. Financial Reporting helps the investors to choose the right options while investing in the organization. 
2. Financial Reporting helps the near and dear ones of the Directors or the Stakeholders of the organisation to make investment decisions. 
3. The Credit line of the organisations needs to be assessed by the banks to provide loans 
4. Bargaining with the labor unions
5. For making credit card applications by the organisation Financial Reporting is required to be taken into consideration. 
6. Financial Reporting is used in the Mergers and Acquisitions 

Financial Reporting Requirements 

The requirements of Financial Reporting are changing as per the changing circumstances and the scenario. There are various boards such as the Financial Accounting Standards Board, the Government Accounting Standards Board, the International Accounting Standards Board, etc. 

The Financial Reporting of small and large organisations is different as per their size because the smaller organisations are required to make fewer disclosures in comparison to the larger organisations. Small organizations or start-ups are not required to disclose their Financial reports to the general public Large organisations are required to disclose their Financial Reporting to the general public to make them aware of their decisions. 

What are the Financial Reporting Examples?

Financial Reporting is usually prepared and released by the organisations on their websites but there are certain other platforms on which the Financial Reporting can be published. These are as: 

• FORM 10-Q: The organizations are required to file FORM 10-Q quarterly with the SEC. This form is important because it allows external agencies to understand the performance of the organisation three times a year. 

• Notes to the Financial Statements: The notes provided to the Financial Statement and the FORM 10-Q help in understanding the Financial Reporting in a better way. 

• FORM- 10 K Part 1: This part of FORM 10 K allows the organizations to discuss the qualitative not quantitive decisions of the organisations. The qualitative decisions run from the strengths and weaknesses of the organisations. 

• Annual Reports: Annual reports are considered more friendly than the FORM K because they consist of charts, illustrations, pictures, etc. These pictures are used as marketing materials for the stakeholders, and customers of the organisation. 

Conclusion

Financial Reporting empowers organizations to communicate their financial health to a wide range of stakeholders. By understanding its objectives, methods, and limitations, you can leverage this powerful tool to achieve your business goals.

Frequently Asked Questions

Q1. What should a Financial Report include?

Ans1. A Financial Report gives the necessary sneak peek into the company’s financial affairs therefore it is imperative to include what is the income, what were the expenditures, and where it is being utilised. 

Q2. What is Financial Reporting?

Ans2. Financial Reporting is the process of reporting, recording, and representing the organisation’s financial data. 

Q3. What is Financial Reporting and Analysis?

Ans3. Financial Reporting and Analysis is the process of recording the financial data of the organisation into the book of accounts and thereby reading it in line with the growth perspective of the organisation.

Q4. What information does a Financial Report provide?

Ans4.  Financial Reporting provides an elaborative response to the financial objectives of the organisation, claims made, and the effect of these actions in the future on the growth of the organisation. 

Q5. What are the 4 types of Financial Reporting?

Ans5. The 4 types of Financial Reporting are Balance Sheets, Income Statements, Cash Flow Statement, Statement of Equity.