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12 Min. Read
What Is Financial Reporting? Definition, Importance, and Types
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What Is Financial Reporting? Definition, Importance, and Types
March 1, 2024
As a business owner, you understand that success can only truly be a success when it’s indicated by measurable, comparable, and accurate figures. Financial reporting is one of the most important parts of this process. It’s used to manage the success of your business, stay on track for your goals and milestones, and help you when making important decisions in the future.
Financial reporting provides financial information about businesses that is useful to investors and other users in making decisions. Financial reporting uses financial statements and reports to disclose financial data that indicate the economic health of a company over a specific period of time. The information is vital for management to make decisions about the company’s future and provides information to capital providers like creditors and investors about the profitability and financial stability of the company.
Key Takeaways
A strong financial reporting system will help guide you and your business to new heights—provided it’s done the right way. Here’s what you need to know:
The four main financial statements include a balance sheet, an income statement, a statement of cash flows, and a statement of changes in equity (or a statement of shareholders’ equity).
Financial reporting isn’t just required by law; it’s essential to ensure the growth and long-term success of your company.
Financial reporting is intended to help track a business’s income, cash flow, profitability, and overall viability in the long run—but it needs to be done correctly.
The goal of financial reporting is to present financial information that is complete, accurate, comparable, verifiable, understandable, and timely.
Publicly traded U.S. companies are required by law to follow GAAP (generally accepted accounting principles) in their financial reporting.
This article will also review the following areas:
Types of Financial Reports
Why Is Financial Reporting Important?
Benefits Of Financial Reporting
What Is the Purpose of Financial Reporting?
What Does Financial Reporting Include?
Conclusion
Frequently Asked Questions
Types of Financial Reports
As a business owner, you’re likely to work in a few different formats of financial reporting, depending on your specific needs and goals at that moment. Here are a few of the most common and most important types of financial statements:
Balance Sheet
Think of a balance sheet as a snapshot of your business’s financial health at a specific date. These are often considered one of the most essential financial reports since they clearly present your business’s, and shareholder’s equity, providing a clear, overall perspective on your business’s financial status. A classified balance sheet distinguishes current and noncurrent assets and liabilities.
Income Statement
Also sometimes called a Profit & Loss Report, an income statement is a common tool to help you obtain information about your company’s revenues, expenses, gains, and losses during a particular period. Unlike the balance sheet, which provides information about a company’s financial position on a given date (for example, as of December 31, 20xx), the income statement summarizes the changes in shareholder’s equity that occurred during a period (year, quarter). Since this report focuses on profit-generating activities, it can be a very useful tool for potential investors and creditors.
Statement of Cash Flows
This type of statement is used to analyze how much cash is generated by the business and where it is spent. This statement shows changes in cash during the period. It is often used by business owners in need of insight into their business’s insolvency and liquidity. It can be used to track and manage spending as well as to help in securing loans and other funding.
Statement of Shareholders’ Equity
This statement is intended to help business owners keep track of any changes in retained earnings after dividends are released to shareholders. Its purpose is to report changes in shareholders’ accounts during the period from investments by owners, distributions to owners, net income, and other comprehensive income. This is invaluable for providing insight to those supporting the business financially. It also provides more in-depth insight into a company’s performance thanks to reporting on equity withdrawals and dividend payments.
Notes to Financial Statements
Notes to financial statements (also called financial disclosures) refer to any other notes and information provided alongside financial statements. These notes allow other readers to better read and interpret the information provided in statements as well as evaluate the firm’s performance. The notes usually include a summary of significant accounting policies (accounting methods, depreciation methods, and inventory measurement methods, like LIFO or FIFO). For instance, a note to financial statements will often state the ‘basis for accounting’ (whether cash or accrual accounting methods were used). Other notes will explain how figures were calculated in detail, providing greater reliability and accountability to your reports.
Why Is Financial Reporting Important?
When done properly, financial reporting offers many benefits to all who are involved with a business. With that said, however, the main goal of financial reporting is to provide insight and information to stakeholders, business owners, partners, and other important roles. Using the information gained from financial reporting, these parties can make more informed decisions for the good of the business and their investments.
Financial statements provide various important financial information that helps investors, creditors, and analysts evaluate a company’s financial performance. A lot of the financial information in financial reports is also required by law or by accounting standard practices.
Financial reporting helps management communicate important business events and transactions, as well as past successes and future expectations of the business.
Here are a few reasons why financial reporting is important to your business:
1. Ensuring Tax Compliance (and Optimizing Liability)
The most important reason to use financial reports is that you have to and are required by law to do so. The Internal Revenue Agency uses these reports to make sure you’re paying your fair share of taxes.
Businesses that make a lot of profit have to pay quite a lot of taxes. Accurate financial reporting helps reduce their tax burden and helps them ensure that all their resources are not depleted in a short amount of time.
2. Showing Financial Condition to Potential Investors
Potential investors want to know how well the company is doing before they invest. Investors, creditors, and other capital providers rely on a company’s financial reporting to gauge the safety and profitability of their investments. Stakeholders want to know where their money went and where it is now. Financial statements like the balance sheet address provide detailed information about the company’s asset investments and outstanding debt and equity components. Investors and creditors can use this information to better understand the company’s position and capital mix.
3. Evaluating Operations at Scale Over Longer Periods of Time
The information on a balance sheet is a snapshot of a company’s assets and liabilities at the end of a financial period. However, a balance sheet doesn’t show what operational changes might have occurred to cause changes in the financial condition of a company. Operating results during the period are also something investors need to consider. A change statement, such as an income statement, shares results about sales, expenses, and profit or losses during the period. Using the income statement, investors can both evaluate a company’s past income performance and assess future cash flow.
4. Examining and Analyzing Cash Flow
A company’s profits are reported in the income statement but provide no direct information on the company’s cash changes. A company incurs cash inflows and outflows during a period from operating activities and non-operating activities, namely investing and financing. Cash from all sources, not only revenue from operations, is what pays investors back. That’s why a cash flow statement is an important statement for an investor to review. The cash flow statement shows the changes in cash during a period of time. By reviewing this statement, investors can know if a company has enough cash to pay for expenses and purchases.
5. Examining and Distributing Information on Shareholder Equity
The statement of shareholders’ equity is important to equity investors. It shows the changes to various equity components like retained earnings during a period. Shareholder equity is a company’s total assets minus its total liabilities and represents a company’s net worth. Steady growth in a business’s shareholders’ equity because of increasing retained earnings, as opposed to expanding the shareholder base, means higher investment returns for current equity shareholders.
6. Help with Business Decision-Making, Planning, and Forecasting
When a business needs to make a decision, analyzing financial statements is crucial. Managers can look at the value of the assets that a business currently holds and decide if they can afford to purchase more to expand business operations. Conversely, when the value of assets is severely depreciated, managers can decide if they need to be sold off.
7. Mitigate Financial Reporting Errors
Accurate financial reporting can help businesses catch costly mistakes and inter errors early on in the process. There is no better way to detect illegal financial activities than through discrepancies found in financial statements. Through a reconciliation process, errors that have been made can be found. Companies spend a lot of time reconciling their books of accounts and verifying each journal entry, so they can find if an accounting error has occurred or if anyone has tampered with any part of the business.
Benefits Of Financial Reporting
Still wondering about the benefits of setting up a strong financial reporting system for your business? While it can lead to additional administrative work, good financial reporting offers countless benefits to your business as well. These include:
Optimized debt management
Real-time insights and tracking for quick business decisions
Identification and forecasting of business trends
Managing liabilities and keeping them in check with assets
Greater ease of access and communication of important financial records
Cash flow insights and analysis
Providing useful information to current and potential investors and creditors
Internal controls to prevent fraudulent activities
What Is the Purpose of Financial Reporting?
The main objective behind financial reporting is to provide business owners, shareholders, and other decision-makers with all of the information they need to make the best choices for the company. Financial reporting affects everything from cash flow to dividends and should account for all streams of profit and loss to ensure a complete, useful picture.
Generally, financial reporting provides information about the results of operations, financial position, and cash flows of a business. Readers review the statements to decide the allocations of resources.
Financial reporting is a way of following standard accounting practices to give an accurate depiction of a company’s finances, including:
Revenues
Expenses
Profits
Capital
Cashflow
What Does Financial Reporting Include?
The process of producing statements that disclose a business’s financial status to management, investors, and the government is known as Financial Reporting.
Financial reporting includes:
External financial statements (e.g., income statement, statement of comprehensive income, balance sheet, statement of cash flows, and statement of stockholders’ equity)
Notes to the financial statements
Communications regarding quarterly earnings and related information (often via press releases and conference calls)
Quarterly and annual reports to stockholders
Financial information and reports posted on a business’s website
Financial reports to governmental agencies, including quarterly and annual reports to the Securities and Exchange Commission (SEC)
Documentation pertaining to the issuance of common stock and other securities
Conclusion
Financial reporting can be a complex system to put into place, but it’s nevertheless essential to running a successful business. Though each and every company has a slightly different system to meet its unique reporting needs, you’ll find much in common from business to business.
If you’re searching for a tool to help make financial reporting simpler for your business, FreshBooks is here to help. Our cloud-based accounting services are ideal for the quick, easy filing of important financial information, and reports such as your cash flow statement, income statement, and more can be generated within just a couple of clicks. Save yourself the time, money, and margin for error that comes with hand-creating these essential financial reports—click here to try FreshBooks for free and see firsthand the difference it can make for your company’s financial health.
FAQs on Financial Reporting
More questions on setting up your financial reporting system, tracking financial performance, or tools for the perfect financial statement? Here are answers to some of the most commonly asked questions.
Is financial reporting the same as accounting?
No. While both financial reporting and accounting tend to deal with the same information, these are two very different (but interconnected processes). Financial reporting focuses on compiling and organizing financial information, whereas accounting refers to interpreting, analyzing, and making decisions based on that information to ensure a business’s financial health.
What is a financial reporting example?
Financial reporting can be internal (e.g., profit and loss statements provided to your accountant) or external (e.g., holding a press release or conference to announce annual/quarterly earnings to stockholders). If your company has shareholders, you’ll likely be doing a fair amount of both kinds of financial reporting.
Who prepares financial statements?
A company’s management is responsible for the integrity and neutrality of financial statements and needs to sign off on them. Typically, business directors will prepare financial reports. In a rigorous system, these statements would then pass through an auditor (or an audit committee), who is responsible for ensuring the information is accurate and free of any errors or discrepancies.
How do I become a financial reporting analyst?
Reporting analysts are expected to have a minimum educational level of a bachelor’s degree in business, accounting, finance, information management, or a related major. You’ll also need demonstrable experience and a strong working knowledge of the financial analysis process. Lastly, it’s important that you know and follows the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
What are financial reporting skills?
Certain skills can be a big help in creating better, more accurate financial reports. These include knowledge of reading and analyzing financial statements, generating reports with the help of tools like Excel or accounting software like FreshBooks, and familiarity and compliance with the Generally Accepted Accounting Principles, or GAAP, as well as the International Financial Reporting Standards (IFRS).
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Financial Statements: List of Types and How to Read Them
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Table of Contents
What Are Financial Statements?
Their Purpose
Balance Sheet
Income Statement
Cash Flow Statement
Statement of Changes in Shareholder Equity
Statement of Comprehensive Income
Nonprofit Financial Statements
Limitations
FAQs
The Bottom Line
Corporate Finance
Financial statements: Balance, income, cash flow, and equity
Financial Statements: List of Types and How to Read Them
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What Are Financial Statements?
Financial statements are written records that convey the financial activities of a company. Financial statements are often audited by government agencies and accountants to ensure accuracy and for tax, financing, or investing purposes. For-profit primary financial statements include the balance sheet, income statement, statement of cash flow, and statement of changes in equity. Nonprofit entities use a similar but different set of financial statements.
Key Takeaways
Financial statements provide interested parties with a company's overall financial condition and profitability.Statements required by Generally Accepted Accounting Principles are the balance sheet, the income statement, and the statement of cash flows, but you'll likely see more in reports.The balance sheet provides an overview of assets, liabilities, and shareholders' equity as a snapshot in time.The income statement primarily focuses on a company's revenues and expenses during a particular period. Once expenses are subtracted from revenues, the statement produces a company's profit figure called net income.The cash flow statement (CFS) tracks how a company uses its cash to pay its debt obligations and fund its operating expenses and investments.
Investopedia / Julie Bang
Understanding Financial Statements
Investors and financial analysts rely on financial data to analyze a company's performance and make predictions about the future direction of its stock price. One of the most important resources of reliable and audited financial data is the annual report, which contains the firm's financial statements.
The financial statements are used by investors, market analysts, and creditors to evaluate a company's financial health and earnings potential. The three major financial statement reports are the balance sheet, income statement, and statement of cash flows.
Not all financial statements are created equally. The rules used by U.S. companies are called Generally Accepted Accounting Principles, while the rules often used by international companies are International Financial Reporting Standards (IFRS). In addition, U.S. government agencies use a different set of financial reporting rules.
Balance Sheet
The balance sheet provides an overview of a company's assets, liabilities, and shareholders' equity at a specific time and date. The date at the top of the balance sheet tells you when this snapshot was taken; this is generally the end of its annual reporting period. Below is a breakdown of the items in a balance sheet.
Assets
Cash and cash equivalents are liquid assets, which may include Treasury bills and certificates of deposit.
Accounts receivable are the amount of money owed to the company by its customers for the sale of its products and services.
Inventory is the goods a company has on hand, intended to be sold as a course of business. Inventory may include finished goods, work in progress that is not yet finished, or raw materials on hand that have yet to be worked.
Prepaid expenses are costs paid in advance of when they are due. These expenses are recorded as an asset because their value has not yet been recognized; should the benefit not be recognized, the company would theoretically be due a refund.
Property, plant, and equipment are capital assets owned by a company for its long-term benefit. This includes buildings used for manufacturing or heavy machinery used for processing raw materials.
Investments are assets held for speculative future growth. These aren't used in operations; they are simply held for capital appreciation.
Trademarks, patents, goodwill, and other intangible assets can't physically be touched but have future economic (and often long-term benefits) for the company.
Liabilities
Accounts payable are the bills due as part of a business's operations. This includes utility bills, rent invoices, and obligations to buy raw materials.
Wages payable are payments due to staff for time worked.
Notes payable are recorded debt instruments that record official debt agreements, including the payment schedule and amount.
Dividends payable are dividends that have been declared to be awarded to shareholders but have not yet been paid.
Long-term debt can include a variety of obligations, including sinking bond funds, mortgages, or other loans that are due in their entirety in more than one year. Note that the short-term portion of this debt is recorded as a current liability.
Shareholders' Equity
Shareholders' equity is a company's total assets minus its total liabilities. Shareholders' equity (also known as stockholders' equity) represents the amount of money that would be returned to shareholders if all of the assets were liquidated and all debts paid off.
Retained earnings are part of shareholders' equity and are the amount of net earnings that were not paid to shareholders as dividends.
Example of a Balance Sheet
Below is a portion of ExxonMobil Corporation's (XOM) balance sheet for fiscal year 2021, reported as of Dec. 31, 2021.
Total assets were $338.9 billion.Total liabilities were $163.2 billion.Total equity was $175.7 billion.Total liabilities and equity were $338.9 billion, which equals the total assets for the period.
ExxonMobil
Income Statement
Unlike the balance sheet, the income statement covers a range of time, which is a year for annual financial statements and a quarter for quarterly financial statements. The income statement provides an overview of revenues, expenses, net income, and earnings per share.
Revenue
Operating revenue is the revenue earned by selling a company's products or services. The operating revenue for an auto manufacturer would be realized through the production and sale of autos. Operating revenue is generated from the core business activities of a company.
Non-operating revenue is the income earned from non-core business activities. These revenues fall outside the primary function of the business. Some non-operating revenue examples include:
Interest earned on cash in the bankRental income from a propertyIncome from strategic partnerships like royalty payment receiptsIncome from an advertisement display located on the company's property
Other income is the revenue earned from other activities. Other income could include gains from the sale of long-term assets such as land, vehicles, or a subsidiary.
Expenses
Primary expenses are incurred during the process of earning revenue from the primary activity of the business. Expenses include the cost of goods sold (COGS), selling, general and administrative expenses (SG&A), depreciation or amortization, and research and development (R&D).
Typical expenses include employee wages, sales commissions, and utilities such as electricity and transportation.
Expenses that are linked to secondary activities include interest paid on loans or debt. Losses from the sale of an asset are also recorded as expenses.
The main purpose of the income statement is to convey details of profitability and the financial results of business activities; however, it can be very effective in showing whether sales or revenue is increasing when compared over multiple periods.
Investors can also see how well a company's management is controlling expenses to determine whether a company's efforts in reducing the cost of sales might boost profits over time.
Example of an Income Statement
Below is a portion of ExxonMobil Corporation's income statement for fiscal year 2021, reported as of Dec. 31, 2021.
Total revenue was $276.7 billion.Total costs were $254.4 billion.Net income or profit was $23 billion.
ExxonMobil
Cash Flow Statement
The cash flow statement (CFS) shows how cash flows throughout a company. The cash flow statement complements the balance sheet and income statement.
The CFS allows investors to understand how a company's operations are running, where its money is coming from, and how money is being spent. The CFS also provides insight as to whether a company is on a solid financial footing.
The cash flow statement contains three sections that report on the various activities for which a company uses its cash. Those three components of the CFS are listed below.
Operating Activities
The operating activities on the CFS include any sources and uses of cash from running the business and selling its products or services. Cash from operations includes any changes made in cash accounts receivable, depreciation, inventory, and accounts payable. These transactions also include wages, income tax payments, interest payments, rent, and cash receipts from the sale of a product or service.
Investing Activities
Investing activities include any sources and uses of cash from a company's investments in its long-term future. A purchase or sale of an asset, loans made to vendors or received from customers, or any payments related to a merger or acquisition are included in this category.
Also, purchases of fixed assets such as property, plant, and equipment (PPE) are included in this section. In short, changes in equipment, assets, or investments relate to cash from investing.
Financing Activities
Cash from financing activities includes the cash from investors or banks and the cash paid to shareholders. Financing activities include debt issuance, equity issuance, stock repurchases, loans, dividends paid, and debt repayments.
The cash flow statement reconciles the income statement with the balance sheet in three major business activities.
Example of a Cash Flow Statement
Below is a portion of ExxonMobil Corporation's cash flow statement for fiscal year 2021, reported as of Dec. 31, 2021. We can see the three areas of the cash flow statement and their results.
Operating activities generated a positive cash flow of $48 billion.Investing activities generated cash outflows of -$10.2 billion for the period. Additions to property, plant, and equipment made up the majority of cash outflows, which means the company invested in new fixed assets.Financing activities generated cash outflows of -$35.4 billion for the period. Reductions in short-term debt and dividends paid out comprised most of the cash outflows.
ExxonMobil
Statement of Changes in Shareholder Equity
The statement of changes in equity tracks total equity over time. This information ties back to a balance sheet for the same period; the ending balance on the change of equity statement equals the total equity reported on the balance sheet.
The formula for changes to shareholder equity will vary from company to company; in general, there are a couple of components:
Beginning equity: This is the equity at the end of the last period that simply rolls to the start of the next period.
(+) Net income: This is the amount of income the company earned in a given period. The proceeds from operations are automatically recognized as equity in the company, and this income is rolled into retained earnings at year-end.
(-) Dividends: This is the amount of money that is paid out to shareholders from profits. Instead of keeping all of a company's profits, the company may choose to give some profits away to investors.
(+/-) Other comprehensive income: This is the period-over-period change in other comprehensive income. Depending on transactions, this figure may be an addition or subtraction from equity.
In ExxonMobil's statement of changes in equity, the company also records activity for acquisitions, dispositions, amortization of stock-based awards, and other financial activities. This information is useful for analyzing how much money is being retained by the company for future growth as opposed to being distributed externally.
Consolidated Statement of Changes in Equity, ExxonMobil (2021).
Statement of Comprehensive Income
An often less utilized financial statement, the statement of comprehensive income summarizes standard net income while also incorporating changes in other comprehensive income (OCI). Other comprehensive income includes all unrealized gains and losses that are not reported on the income statement. This financial statement shows a company's total change in income, even gains and losses that have yet to be recorded in accordance with accounting rules.
Examples of transactions that are reported on the statement of comprehensive income include:
Net income (from the statement of income)Unrealized gains or losses from debt securitiesUnrealized gains or losses from derivative instrumentsUnrealized translation adjustments due to foreign currencyUnrealized gains or losses from retirement programs
In the example below, ExxonMobil has over $2 billion of net unrecognized income. Instead of reporting just $23.5 billion of net income, ExxonMobil reports nearly $26 billion of total income when considering other comprehensive income.
Consolidated Statement of Comprehensive Income, Exxon Mobil 2021.
Nonprofit Financial Statements
Nonprofit organizations record financial transactions across a similar set of financial statements. However, due to the differences between a for-profit entity and a purely philanthropic entity, there are differences in the financial statements used. The standard set of financial statements used for a nonprofit entity includes:
Statement of Financial Position: This is the equivalent of a for-profit entity's balance sheet. The largest difference is nonprofit entities do not have equity positions; any residual balances after all assets have been liquidated and liabilities have been satisfied are called "net assets."Statement of Activities: This is the equivalent of a for-profit entity's statement of income. This report tracks the changes in operation over time, including the reporting of donations, grants, event revenue, and expenses to make everything happen.Statement of Functional Expenses: This is specific to nonprofit entities. The statement of functional expenses reports expenses by entity function (often broken into administrative, program, or fundraising expenses). This information is distributed to the public to explain what proportion of company-wide expenditures are related directly to the mission.Statement of Cash Flow: This is the equivalent of a for-profit entity's statement of cash flow. Though the accounts listed may vary due to the different nature of a nonprofit organization, the statement is still divided into operating, investing, and financing activities.
The purpose of an external auditor is to assess whether an entity's financial statements have been prepared following prevailing accounting rules and whether any material misstatements are impacting the validity of results.
Limitations of Financial Statements
Although financial statements provide a wealth of information on a company, they do have limitations. The statements are often interpreted differently, so investors often draw divergent conclusions about a company's financial performance.
For example, some investors might want stock repurchases, while others might prefer to see that money invested in long-term assets. A company's debt level might be fine for one investor, while another might have concerns about the level of debt for the company.
When analyzing financial statements, it's important to compare multiple periods to determine any trends and compare the company's results to its peers in the same industry.
Lastly, financial statements are only as reliable as the information fed into the reports. Too often, it's been documented that fraudulent financial activity or poor control oversight have led to misstated financial statements intended to mislead users. Even when analyzing audited financial statements, there is a level of trust that users must place in the validity of the report and the figures being shown.
What Are the Main Types of Financial Statements?
The three main types of financial statements are the balance sheet, the income statement, and the cash flow statement. These three statements together show the assets and liabilities of a business, its revenues, and costs, as well as its cash flows from operating, investing, and financing activities.
What Are the Benefits of Financial Statements?
Financial statements show how a business operates. It provides insight into how much and how a business generates revenues, what the cost of doing business is, how efficiently it manages its cash, and what its assets and liabilities are. Financial statements provide all the details on how well or poorly a company manages itself.
How Do You Read Financial Statements?
Financial statements are read in several different ways. First, financial statements can be compared to prior periods to understand changes over time better. Financial statements are also read by comparing the results to competitors or other industry participants. By comparing financial statements to other companies, analysts can get a better sense of which companies are performing the best and which are lagging behind the rest of the industry.
What Is GAAP?
Generally Accepted Accounting Principles (GAAP) are the rules by which publicly-owned United States companies must prepare their financial statements. It is the guideline that explains how to record transactions, when to recognize revenue, and when expenses must be recognized. International companies may use a similar but different set of rules called International Financial Reporting Standards (IFRS).
The Bottom Line
Financial statements are the ticket to the external evaluation of a company's financial performance. The balance sheet reports a company's financial health through its liquidity and solvency, while the income statement reports its profitability. A statement of cash flow ties these two together by tracking sources and uses of cash. Together, these financial statements attempt to provide a more clear picture of a business's financial standing.
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our
editorial policy.
U.S. Securities and Exchange Commission. "Exxon Mobile Corporation Form 10-K for the Fiscal Year Ended Dec. 31, 2021."
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Related Terms
Balance Sheet: Explanation, Components, and Examples
A balance sheet is a financial statement that reports a company's assets, liabilities and shareholder equity at a specific point in time.
more
Free Cash Flow (FCF): Formula to Calculate and Interpret It
Free cash flow (FCF) represents the cash a company can generate after accounting for capital expenditures needed to maintain or maximize its asset base.
more
What Are Accruals? How Accrual Accounting Works, With Examples
Accruals are revenues earned or expenses incurred that impact a company's net income, although cash has not yet exchanged hands.
more
Available-for-Sale Securities: Definition, vs. Held-for-Trading
An available-for-sale security is a security procured with the plan to sell before maturity or to hold it for a long period if there is no maturity date.
more
Return on Equity (ROE) Calculation and What It Means
Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity.
more
Capital Expenditure (CapEx) Definition, Formula, and Examples
Capital expenditures (CapEx) are funds used by a company to acquire or upgrade physical assets such as property, buildings, or equipment.
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Free Cash Flow (FCF): Formula to Calculate and Interpret It
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What Are Accruals? How Accrual Accounting Works, With Examples
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What Is Financial Reporting?
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Financial reporting is a critical aspect of business operations, for investors and stakeholders. When it's done correctly, financial reporting provides investors with accurate information to prove the business is worth the investment. This reporting isn't only good for business, it is required from a regulatory standpoint.
Read on to learn about the types of financial reporting, global financial reporting requirements and the importance of financial reporting for businesses.
Financial Reporting 101
What is financial reporting? First and foremost, financial reporting provides a way to analyze business income, track changes and make decisions. Types of financial reports, which we'll explore in a moment, provide helpful information about cash flow, income and debts, and business performance overall.
By looking at these reports, stakeholders can make decisions about what's next for the business based on cash flow, assets and liabilities.
At a high level, you'll understand the financial positioning of the business and how it enables you to respond to market threats or opportunities. Looking closely at a particular aspect of business finances, you'll be able to make improvements to strengthen the business.
When you have financial reports, you can look at them to track future growth. This isn't crystal ball gazing; this is looking at where you've come from and making data-driven decisions about what you can expect in the future based on present and past performance. If the potential future of your business isn't what you hoped, there's still time to make changes and prepare for a desired future state.
Good financial reporting also provides up-to-date information for investors, for their benefit. Anyone thinking of investing in the company will want to know the business can make good use of their money. They'll want proof they will get a good return on investment by investing in your company instead of a competitor. Financial reports allow them to do their due diligence when planning investments.
Financial reporting also helps your business meet tax, accounting and legal compliance requirements.
Types of Financial Statements
There are several types of financial statements to know. Here are common financial reports businesses need to put together to be in compliance, regardless of whether they are large or small.
Income Statements
Income sheets track business finances for a set period, such as a quarter or a year. Since they report business profits and losses, they can sometimes be called profit and loss statements or P&Ls. Regardless of the name you use for this document, think of it as the central dashboard for business income and losses.
Income statements track income, expenses, revenue and (for publicly traded companies) what's known as earnings per capital share.
To break it down further, you might come across these terms on an income statement:
Operating revenue: This is revenue from sales of products or services
Net and gross revenue: Total sales revenue and gross revenue after costs
Non-operating revenue: Revenue that comes from outside the business operation, such as interest, capital gains or investment income
Primary expenses: Expenses related to administrative costs, general operations, deprecation or cost of goods sold (COGS) — including cost of goods sold (COGS), depreciation and selling, general and administrative costs (SG&A)
Secondary expense: Expenses related to debt or asset loss
Cash Flow Statements
Cash flow statements show the financial health of a business in terms of how well its revenue supports expenses. A cash flow statement lists your cash flow by considering:
Accounts receivable
Accounts payable
Wages
Income tax
Investment earnings
Owned assets (such as equipment or real property)
Cash payments
Financing activities
Balance Sheets
A balance sheet shows the assets, liabilities and equity of the business for a set period, usually for one quarter. Balance sheets show the business liquidity in terms of assets, current liabilities (short- and long-term debt), and shareholder or owner equity, when relevant. The balance sheet is similar to the income statement, but for a shorter duration.All Other Financial Documents
While the three statements mentioned above are the most frequently used financial statements, there are other statements to know. Companies can put any publicly communicated information into their financial report workflow, provided that it's relevant.
Here are some of the other types of documents to know:
Statement of shareholder equity: This statement can be incorporated on the balance sheet for smaller companies. However, larger companies may wish to put up a separate document that displays shareholder equity.
Statement of retained earnings: If there were changes in equity, the statement of retained earnings mentions this information.
Quarterly and annual reports: Quarterly and annual reports given to stockholders are often incorporated into financial reports.
Press releases: If you put out press releases related to quarterly earnings, these may be included.
ESG reporting: If your company has an ESG component, you may wish to highlight it with ESG reporting.
Financial Reporting Requirements
While the nature of required reports varies based on the nature and type of business, there are several generally accepted accounting principles (GAAP) that apply to the reports. These are issued by the Financial Accounting Standards Board and are applied to any submissions made to the SEC. If the company is publicly traded, remaining compliant with these GAAP standards is crucial for maintaining trust in the markets. There are two factors to keep in mind when considering financial reporting requirements.
The first is financial reporting software. The right software makes it simple to gather the necessary documentation and pull information from different sources without losing accuracy. Investing in reporting software can enable your business to easily meet reporting needs while leveraging artificial intelligence and machine learning to streamline workflow. This also ensures that all documents are compliant with GAAP.
Investing in reporting software can enable your business to easily meet reporting needs while leveraging artificial intelligence and machine learning to streamline workflow.
The second item to keep in mind is the tendency of reporting requirements to change over time. It isn't enough to meet current requirements; you must anticipate the future of financial reporting.
A trusted partner is essential to provide guidance and help businesses future-proof their financial reporting using intelligent software.
International Accounting and Reporting Standards
Companies that do business overseas may be required to submit different types of financial documents and adhere to a different set of reporting guidelines. One example is the International Financial Reporting Standards, which includes profiles for 166 jurisdictions, including the European Union. Another is Form 20-F, which is required for foreign-based businesses that report to the SEC when doing business in the United States.
Navigating all these obligations can be challenging for a business of any size. With the right financial reporting software, however, the process can be streamlined and made much easier. To learn more about what DFIN’s solutions can do for you, get in touch with us today.
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What Is Financial Reporting And Analysis? See A Full Guide
Is Financial Reporting And Analysis? See A Full Guide BI Blog | Data Visualization & Analytics Blog | datapine FREE TRIALLOG INPRODUCTOverviewdata connectorsSelf-service analyticsDashboardsdata alertsShare & reportEmbedded AnalyticsDEMO DASHBOARDSdatapine differencesolutionsBY INDUSTRYConstructionENERGYfinancial servicesHEALTHCARELOGISTICSInsuranceMANUFACTURINGMARKET RESEARCHMEDIARETAILBY FUNCTIONBusiness IntelligenceExecutiveFinanceHRITMarketingProcurementSalesService & SupportservicespocBI consultingETL as a servicelearnDOCUMENTATIONvideo & tutorialsKPI ExamplesData warehouseData securityArticles & GuidesBlogCOMPANYcareernewsPartner Programbecome a partnercustomersContact usThe datapine BlogNews, Insights and Advice for Getting your Data in ShapeThe Importance Of Financial Reporting And Analysis: Your Essential GuideBy Bernardita Calzon in Dashboarding, Feb 15th 2024Table of Contents1) What Is Financial Reporting?2) Why Is Financial Reporting Important?3) The Benefits Of Financial Reporting4) Who Uses Financial Reporting And Analysis?5) 5 Use-Cases For Financial Reporting6) Different Ways Of Financial Reporting 7) Common Types Of Financial Reporting8) Key Elements Of Financial Reporting Systems9) Financial Reporting And Analysis TrendsWhile you may already know that a detailed business financial reporting process is important (mainly because it’s a legal requirement in most countries), you may not understand its untapped power and potential. In fact, financial analysis is one of the bedrocks of modern businesses. It offers insight that helps companies remain compliant while streamlining their income or expenditure-centric initiatives.Utilizing finances data with the help of online data analysis allows you to not only share vital information internally and externally but also leverage metrics or insights to make significant improvements to the area that helps your business flow. To help you unlock the potential of financial analysis and reporting, we’ve produced this guide to tell you everything you need to know about the topic. Let’s hit it off with a detailed definition. What Is Financial Reporting And Analysis?Financial reporting and analysis is the process of collecting and tracking data on a company’s finances on a monthly, quarterly, or yearly basis. Businesses use them to inform their strategic decisions, gain new investors, and comply with tax regulations.Each of these financial KPIs is incredibly important because they demonstrate a company's overall ‘health’ – at least when it comes to the small matter of money. These types of KPI reports don’t offer much insight into a company’s culture or management structure, but they are vital to success, nonetheless.As we continue, we’ll explore financial company analysis use cases. But first, it’s worth noting that these reports are crucial for anyone looking to make informed decisions about their business. Financial reporting software and BI reporting tools offer invaluable information on investments, credit extensions, cash flow, and so on. It is also legally required for tax purposes.That said, various types of financial reporting and analysis can serve different purposes. Some of the most common ones include: Income Statement: Also known as profit and loss, an income statement is a financial analysis report that shows the company’s income and expenses over a given period with a focus on four key elements: revenue, expenses, gains, and losses. The main goal of this statement is to understand if the business is making money or not. It does this by summarizing key sales activities, costs of production, and any other operational expenses during an accounting period. The report subtracts the revenue from all expenses to understand how much profit (or loss) the business had. Balance Sheet: It provides a detailed overview of a company's assets, liabilities, and stockholders’ equity. Essentially, a balance sheet summarizes the business’s economic health at a given point, usually monthly or quarterly, and can be used for internal or external purposes. On the one hand, it can be reviewed internally by any stakeholder, such as managers or employees, to understand if the company is going in the right direction. On the other hand, anyone interested in investing can use a balance sheet externally, as the report provides useful information about the available resources and how they were financed. Cash Flow Statement: In simple words, a cash flow statement shows the amount of cash the company generates and the costs for which the cash is being spent. It contains elements of the income statement and the balance sheet, making it critical to successfully managing a business. A cash flow statement is usually divided into 3 different areas that classify all the cash received and paid. First, we see the operating cash flow, which shows revenue, expenses, gains, and losses, and then we have the investing one, which shows the cash from debt and equity purchases and sales. Lastly, we have the financial one, which reports on long-term liabilities such as loan payments and equity items such as the sales of company stock. Statement of shareholder equity: As its name suggests, this report shows the changes in shareholders' equity from the beginning to the end of an observed accounting period, typically a year. It gives investors transparency regarding their equity, how it is fluctuating, and what business activities are responsible for those changes. It does this by calculating the difference between the company’s assets and liabilities, constituting a key part of a balance sheet. However, big corporations might generate it as a separate statement. The statement of shareholders' equity is usually composed of the following elements: preferred and common stock, treasury stock, additional paid-up capital, retained earnings, and unrealized gains and losses, among other things. Statement of retained earnings: Connected to the previous report type, the statement of retained earnings shows the accumulated profit of a business after net income has been summed and dividends paid to shareholders. It shows how much earnings a company has made during an observed period and helps owners and decision-makers assess the business's financial situation and evaluate potential reinvestments or growth opportunities based on the retained earnings left for the coming accounting period. It can be generated as a part of a balance sheet, income statement, or separate document. ESG reporting: ESG stands for environmental, social, and governance reports. This reporting type has become increasingly popular now that legislators, societal expectations, and investors are turning their attention to the environmental impact of businesses, pressuring them to be transparent about the climate impact of their activities and operations. Because of this growing interest, ESG factors are now considered indicators of a company's long-term success; investors and key stakeholders request that these factors be included in the company's statements. That said, a well-constructed ESG report should include environmental performance metrics such as energy use, greenhouse gas emissions, water usage, and waste generated, social metrics such as labor practices, human rights impact, and diversity efforts, and lastly, governance metrics such as regulatory compliance, board structure, and political contributions, among others. This is especially important now that sustainable technology is considered amongst the biggest growing technology trends of 2024.Whatever your company’s goals are, with the right analytical approach, you can significantly accelerate the growth of your business. In this post, we will see the power of financial analysis and reporting in detail, look at real-world finance reporting examples, and discuss why this approach should be vital to every modern business strategy.Now that we’ve explored what we consider a good definition of corporate financial reporting, let’s glance at the importance of these kinds of reports.Your Chance: Want to test a financial reporting software for free? Explore our 14-day trial & take your financial reporting to the next level!Why Is Financial Reporting Important?A report from McKinsey suggests that leveraging data to create more proficient marketing reports and to make more informed decisions can boost marketing productivity by 15 to 20%, which translates to as much as $200 billion based on the average annual global marketing spend of $1 trillion per year.If you apply that same logic to the finance sector or department, it’s clear that reporting tools could benefit your business by giving you a more informed snapshot of your activities.Financial reports offer a wealth of insight that can streamline your business’s fiscal activities. To illustrate the importance of this process further, let’s break these ten primary reasons for corporate financial reporting down into more detail.1) For taxesYou may have heard the phrase: the only two certainties in this world are death and taxes (or something similar).That said, taxes are arguably the biggest reason for the importance of financial statement analysis – basically, you have to do it! The government utilizes such reports to ensure you pay your fair share of taxes. If financial reports weren’t legally required, most companies would probably use management dashboards instead (at least for internal decision-making purposes).The government’s requirements for these documents have created an entire industry of auditing firms (like the “Big 4” of KPMG, Ernst & Young, Deloitte, and PWC, among others) that exist to review companies’ financial reports independently. This auditing process is also a legal requirement.2) For other companies, investors, shareholders, etc.If you’re considering investing in a company, it only makes sense that you’ll want to know how well it is doing.This is where the importance of financial statements comes into play for investors, credit vendors, and banks considering lending money to a company. In these situations, you will need to understand how likely you are to be paid back so that you can charge interest accordingly. For this purpose, it’s great to have an investor relations dashboard at hand. With metrics such as the return on assets, return on equity, debt-equity ratio, and more, the investor’s dashboard displayed below offers a detailed overview of the company’s performance tracked over a period of time. The value of this tool lies in its interactivity. If you want to take a deeper look at some of these indicators, you just need to click on them, and the entire report will be filtered based on that. **click to enlarge**The importance of financial analysis and statements also applies to stakeholders. If you own equity in a firm or are an activist investor who owns a major equity position, then having full disclosure of all assets, liabilities, use of cash, revenues, and associated costs is essential. You will also want to understand if the business is doing something it shouldn’t (such as in the case of Enron).Due to a series of laws known as Sarbanes-Oxley, there is more standardization/legal cooperation within the world of financial data analysis and reporting. These laws are designed to prevent another situation like, and we’ll say it again – Enron – from happening.3) For internal decision-makingAs mentioned, financial reports are not the best tools for making all internal business decisions. However, they can serve as the ‘bedrock’ for other reports (such as management reports) that CAN and SHOULD be used to make decisions.These reports must be as accurate as possible – otherwise, any management reports (and ensuing decisions) based on them will be sitting on a shaky foundation. This is where companies can run into trouble, using legacy methods (such as one massive spreadsheet that multiple users have access to) rather than reaping the benefits of reporting by utilizing financial dashboards instead.In fact, a survey conducted by Deloitte to generate awareness about the value of good financial analytics reporting states that most respondents have identified an “insufficient level of details” as the main issue when it comes to reporting on finances. This is because the techniques and templates used are too old. Modern online dashboards put these problems in the past by providing at-a-glance information on your company's financial health for both yourself and others in a way that is intuitive and detailed.Remember: the government (and outside investors) don’t care WHY your financial reports are inaccurate. They’ll just penalize you for being wrong – it’s that cut and dry.4) For improved internal vision,Things can quickly fall apart if your financial insights or data are fragmented. Financial analysis and reporting are accurate, cohesive, and widely accessible ways of sharing critical financial information throughout your organization. They help answer a host of vital questions on all aspects of your company’s financial activities, giving internal and external stakeholders an accurate, comprehensive snapshot of the strategic and operational metrics they need to make decisions and take informed action.5) For building strategies and ensuring profitabilityExpanding on the previous point, financial analysis and reporting are critical to building informed strategies and ensuring the business stays profitable. In fact, going back to the Deloitte survey we mentioned earlier, 67% of the respondents believe that the information included in their financial statements is key to “identifying effective ways to reduce costs and to eliminate potential losses to maintain profitability.” That said, these types of reports become critical to the financial health of a business. It allows managers and other stakeholders to build informed strategies to make the company more profitable while empowering every key player to rely on data for decision-making. With the help of modern online reporting software, companies can find trends and patterns in real-time and monitor their income and expenses to allocate resources smartly. 6) For raising capital and performing auditsFinancial reporting and analysis assist organizations, regardless of industry, in raising domestic and overseas capital in a well-managed, fluent way – an essential component to ongoing commercial success in today's competitive digital world.Also, financial analysis and reporting facilitate statutory audits. Statutory auditors are required to audit an organization's financial statements to express their opinion. Reporting tools or software will give this official, concise, accurate, and compliant information – which, of course, is vital.7) For managing financial ratiosRatios are essential to a business’s fiscal management initiatives - and there are many to consider. In this context, ratios represent the fine juggling act businesses must perform to ensure the operation runs efficiently.Financial ratios also help investors break down the colossal data sets accrued by businesses. A ratio gives your information form and direction, facilitating valuable comparisons on different reporting periods.Displayed visually, modern financial graphs and dashboards provide invaluable performance-based information at a glance, offering essential tools for accurate benchmarking and real-time decision-making.Critical finance analysis ratios include the Working Capital Ratio, Quick Ratio, Return on Equity (ROE), and Berry Ratio. Armed with this wealth of insight, it’s possible to preserve your company’s financial health while developing initiatives that tip the fiscal balance in your favor, boosting your bottom line. The image below is a visual example of financial reporting tracking the quick ratio. Generated with a professional financial KPI tool, the quick ratio is a metric that tracks the short-term liquidity or near-cash assets that can be turned quickly into cash. The point of this KPI, also known as the acid test ratio, is to include only the assets that can be easily converted into cash, usually within 90 days or so, such as accounts receivable.8) For accurate projections & predictive strategiesWhen considering the importance of financial statements to stakeholders, it’s worth mentioning the predictive power of financial analysis.We’ve explored how financial dashboards offer dynamic visualizations from trend spotting and real-time decision-making. Digging a little deeper, fiscal reporting tools also provide comprehensive insights into a range of financial performance and processes. Historic, real-time, and predictive data combined offer a balanced snapshot of metrics that help users make incredibly accurate projections based on past or emerging trends.By making projections based on concrete visual data, developing strategies that benefit financial health while nipping any potential issues in the bud is possible.For example, personal financial management provider Mint.com used predictive analytics to grow its user base and increase its bottom line. Analyzing a mix of consumer data and key financial performance metrics, the company was able to streamline its processes while offering its customers an end goal and working backward.By providing a predictive goal or aspiration, the business worked in reverse (both internally and externally), developing accurate solutions or strategies that offered the best return on investment (ROI). Not only did this predictive strategy streamline Mint’s internal processes, but the company grew from zero to 1 million subscribers in a relatively short period.Senior executive Noah Kagan explained the company’s financial triumph:“Think of it as a road trip. You start with a set destination in mind and then plan your route there. You don’t get in your car and start driving without the hope that you magically end up where you wanted to be.”9) To lower risk and prevent fraudulent activitiesExpanding on our previous point, the depth of data and predictive capabilities of the financial BI dashboard software can significantly mitigate financial risk.Working with the right mix of metrics, you will begin to see any potential dips in performance or negative patterns unfold intuitively, which means you can take critical actions that prevent potentially devastating monetary calamities.Armed with dynamic, visual, and interactive KPIs, not only can you mitigate financial risk and protect your company from glaring inefficiencies, but you will also be able to make smarter investments and decisions. Here are some of the KPIs that you should focus on for financial protection and growth:Gross Profit MarginNet Profit MarginWorking CapitalOperating Expense RatioReturn on AssetsReturn on EquityCash Conversion CycleVendor Payment Error RateIn addition to reducing financial risk across the board, an analytics dashboard can also protect your business from fraudulent activity. And, considering 46% of companies across sectors have fallen victim to financial fraud in the past two years, protecting yourself from internal or external cyber-related crime matters now more than ever.Through frequent benchmarking and analysis, you will increase your chances of identifying any abnormalities and investigating the matter immediately. This quick response approach will empower you to get to the root of the problem, tackling the issue while reducing further financial damage.10) To ensure transparency across the boardAs we repeatedly mentioned throughout this post, reporting on finances is key to the internal functioning of a business. But not just that, financial statements are also very useful to ensure transparency. For instance, a business working in the public sector might be financed by taxpayers or donors; therefore, they need to be accountable for the way they spend the money they receive. For this purpose, financial reports play a fundamental role since they ensure that public entities are transparent and compliant and that people maintain a relationship of trust with these entities.Another example is with big enterprises. Customers are becoming more and more critical of the way companies make business decisions today. By making their financial data public and transparent, big enterprises can build stronger relationships with their customers, for example, by showing their charitable actions or sustainability spending. On the other hand, if you offer long-term services, providing information about your company's financial performance can be a reassurance for potential clients that you can stay in business with them for a long time.In summary, financial analysis and reporting can help businesses of all sizes build trusted relationships with investors, shareholders, employees, and even customers. Clearly communicating that the company is doing well financially can bring several benefits. Let’s look at some of them below. The Benefits Of Financial ReportingTo continue our journey, let’s consider the key benefits of financially-based reporting and analytics.Improved debt management: As you know, debt can cripple the progress of any company, regardless of sector. While there may be many different types of financial reporting and analysis concerning purpose or software, almost all solutions will help you track your current assets divided by the current liabilities on your balance sheet to help gauge your liquidity and manage your debts accordingly.Trend identification: Regardless of what area of financial activity you’re looking to track, this kind of reporting will help you identify trends, both past and present, which will empower you to tackle any potential weaknesses while helping you make improvements that will benefit the overall health of your business.Real-time tracking: By gaining access to centralized, real-time insights, you will be able to make accurate, informed decisions swiftly, thereby avoiding any potential roadblocks while maintaining your financial fluidity at all times.Liabilities: Managing liabilities is critical to your company’s ongoing financial health. Business loans, credit lines, credit cards, and credit extended from vendors are all integral liabilities to manage. Using a financial report template, if you plan to apply for a business expansion loan, you can explore finance data and determine if you need to reduce existing liabilities before making an official application.Progress and compliance: As the information served up by financial reporting software is both accurate and robust, not only does access to this level of analytical reporting offer an opportunity to improve your financial efficiency over time, but it will also ensure you remain 100% compliant – which is essential if you want your business to remain active.Cash flow: Big or small, an organization’s cash flow is essential to its ongoing financial health. Working with a mix of detailed metrics and KPIs, it’s possible to drill down into cash flow in relation to anticipated profit and liabilities, keeping your monetary movements secure and fluent in the process.Communication & data access: Any modern financial report worth its salt is accessible to and optimized for a multitude of devices. By gaining unlimited access to essential financial insights, you can respond to challenges swiftly while improving internal communication across the board. If everyone understands emerging trends and can share vital financial insights, your organization will become more efficient, more innovative, and safeguarded against potential compliance issues or errors.Your Chance: Want to test a financial reporting software for free? Explore our 14-day trial & take your financial reporting to the next level!Who Uses Financial Reporting And Analysis?We’ve already stated the importance of financial analysis and reporting throughout the post and how they serve as communication tools to keep internal and external stakeholders informed and connected. Financial reports are versatile analytical tools businesses of all sizes use to review their data, stay compliant, and ensure profitability and healthy financial performance. That said, various groups can benefit from financial analysis and reporting for different purposes; some of them include: Investors, shareholders, and lenders: Investors and shareholders use financial reports to assess the state of their investments and how the company is generating profit. On the other hand, lenders use them to understand the ability of the company to pay back loans and related interest charges. Business Managers: Probably more than any other stakeholder on this list, managers are the ones that can benefit the most from financial reports. Having an efficient financial reporting framework in place allows them to track performance on a deeper level and build smart strategies that will ensure healthy and steady development. Regulatory institutions: Tax agents and various governmental entities also gather financial information to monitor that businesses comply with tax regulations. No matter the business size, paying taxes is an obligation that cannot be evaded. Modern financial analysis allows for an organized view of a company's numbers to ensure that all standard procedures are being followed. More on this point later! Consumers or customers: Transparency is key in customer relationships. Companies and enterprises use financial reports as open communication with their clients about earnings, investment activities, or charitable donations. On the other hand, customers can also benefit from financial statements when considering which supplier to select for a contract, as they can judge the ability of the supplier to stay in business for a long period of time. Employees: Modern financial reporting empowers employees from all departments and levels of knowledge to empower themselves using financial data. Through modern dashboard technology, employees can visualize important financial information to measure the performance of their activities and make informed decisions. 5 Essential Use-Cases For Financial ReportingUp until now, we’ve looked at things from the big picture. Now, let’s get a little more tangible and down-to-earth by exploring some valuable questions that financial reports (and the reports based on them) can help you answer.1. Is purchasing this stock a good idea?If you’re really doing your due diligence on a company you’re considering investing in as an individual or on behalf of your current organization, financial data analysis and reporting can give you some (relatively) “hard” data that will help you make your decision.This is also one way to gain insight into whether a company is potentially under or overpriced in the stock market.2. Are we profitable? Will we be in the future?Without embracing the importance of financial statements, it’s difficult to tell how much your company makes after paying all expenses and payroll. Since a company exists mainly to make profits for itself and its shareholders, this is crucial information – no compromises.3. How much cash ‘runway’ do we currently possess?If you’ve ever been a part of the management team of a startup, you might have some idea of how stressful it can be not to know if you’ll be able to ‘make payroll’ in the coming months.That’s where the importance of financial statements comes in.Cash is oxygen to a business, and financial reporting analysis can help you see how many months’ payroll your business can give out while remaining financially solvent (assuming that revenue numbers stay the same).This is a good ‘worst-case scenario’ exercise to conduct regularly – and it’s even more sturdy if you assume that your revenues will fall over the next few months compared to your best guess projections.4. Do we have the capital to invest in new lines of business?Some companies, like Apple, like to sit on colossal amounts of cash. Their strategy is to have this money built up so they can remain financially solvent even if some catastrophic things happen to the economy.However, other companies prefer to invest their money if they can do so while remaining financially healthy. For example, computer chipset manufacturers like Intel upgrade their factories and equipment regularly.These upgrades are extremely expensive, and while they are a good long-term investment, the company in question must ensure they have the short-term cash flow to support these kinds of moves.5. Are my vendor relationships as healthy as they should be?When considering ‘why is financial analysis important?’ it’s always worth considering your vendors. Whether a service- or product-based business, your vendor or supplier relationships are tightly linked to your company’s ongoing financial health.If your supplier or vendor relationships are strained, inefficient, or fraught with issues, you will stunt organizational productivity, damage your brand reputation, and ultimately, lose money (frequently).Typically, your vendors or suppliers have individual payment processes and credit rules. Streamlined financial analytics ensures payments and transactions remain fluent at all times, especially if used with a modern client dashboard.Plus, by working with metrics such as Vendor Payment Error Rate, it's possible to keep track of vendor payments while identifying any under or overpayments during a set timeframe. Accessing this level of insight will optimize your vendor or supplier processes, saving time and money.3 Different Ways Of Financial Reporting And Analysis“In a perfect world, investors, board members, and executives would have full confidence in companies’ financial statements… Unfortunately, that’s not what happens in the real world, for several reasons.” – Where Financial Reporting Still Falls Short, The Harvard Business Review articleWe won’t get too deep into the ‘financial reporting rabbit hole’ at this point, but we can say with certainty that there are many, many pitfalls associated with this kind of reporting. Some are technical pitfalls, while others are ethical (Enron, anyone?).Right now, it’s enough to understand that there are three main ways that financial reports are standardized and one critical element to consider when working with EU-based data of any kind:The GAAP (Generally Accepted Accounting Principles). This is the system the United States uses, and almost no one else (just like the Imperial measurement system!).The IFRS (International Financial Reporting Standards). This system is utilized by more than 110 countries worldwide, including Canada, Australia, India, and China (although China and India have ‘customized’ the IFRS in their own ways).The GDPR: (The General Data Protection Regulation): The GDPR came into effect on May 25, 2018, and is designed to modernize the laws that protect the personal information of individuals, which means that if you're handling sensitive financial data of any kind, insights or metrics (involving that of your investors, clients or partners), you must ensure that your reports are compliant.These differences in standardization have real-world consequences. As the HBR article linked above states:“Cadbury’s GAAP-based return on equity was 9% — a full five percentage points lower than it was under IFRS (14%). Such differences are large enough to change an acquisition decision.”Your Chance: Want to test a financial reporting software for free? Explore our 14-day trial & take your financial reporting to the next level!6 Common Types Of Financial ReportingFinancial data is not easy to understand, and getting everything together in an infinite Excel sheet makes extracting valuable information from it even harder. With this issue in mind, interactive financial reporting software has been developed to assist businesses in the visualization and analysis of their most important financial information. With technologies such as predictive analytics, automated reporting, and intuitive dashboards, businesses can extract insights in real-time to make important financial decisions. We’ve already theoretically discussed some common types of financial reports at the beginning of this post. Now, we will cover some visual examples of these types to put their value into perspective. These 5 examples were generated with a professional financial dashboard generator. 1) Income StatementThis particular financial reporting template tells you how much money a company made (or lost) in a given time period (typically a fiscal year). It does so by showing you revenues earned and expenses paid, with the ultimate goal of showing a company’s profit numbers.What makes this template so valuable is that it offers a complete overview of the month-to-month performance of the business. For instance, the operating costs (OPEX) are broken down by month and department. This way, decision-makers can spot any inefficiencies and pinpoint the causes and origin to optimize them promptly. Likewise, the earnings before interest and taxes (EBIT) are broken down with a target line to easily evaluate if the business’s finances are developing according to plan.**click to enlarge**Primary KPIs:Gross Profit Margin PercentageOperating Profit Margin PercentageOperating Expense RatioNet Profit Margin Percentage2) Balance SheetMoving on with our list of financial reporting examples, we have a balance sheet generated with a professional dashboard builder that offers a snapshot of your assets and liabilities (aka debts) at a given moment in time. It’s possible to fall into bother with your profitability and cash flow situations while having a healthy balance sheet (especially if you have a lot of money tied up in physical inventory), and this report will help you dig deeper, assisting your strategic decision-making.**click to enlarge**Primary KPIs:Return on AssetsReturn on EquityWorking Capital3) Cash Flow StatementThis report shows how much money flowed into and out of your business during a period. The cash flow statement ensures you have enough money to make payroll.This highly interactive and visually appealing template provides the necessary data to get an overview of your company's liquidity and current cash flow situation. In this case, we can see that the quick ratio is showing a red exclamation mark, which could mean that your company cannot pay the current liabilities with the most liquid assets. To get deeper insights into this situation, the dashboard also offers detailed breakdowns of days sales outstanding and days payable outstanding for the last 12 months, making it possible to find improvement opportunities to drive growth and success.**click to enlarge**Primary KPIs:Current RatioAccounts Payable TurnoverAccounts Receivable TurnoverOur next two financial analysis report examples are full dashboards that host a mix of visual metrics and KPIs, offering a complete picture of a company’s fiscal activities in action. Let’s take a look.4) Financial KPI DashboardOffering an essential snapshot of vital financial performance data, a robust financial KPI dashboard offers a cohesive mix of tables, graphs, and charts designed to maintain fiscal health. Working with KPIs such as Working Capital, Cash Conversion Cycle, Budget Variance, and more, this dynamic financial reporting system will empower you to reduce inefficiencies, make accurate forecasts, and keep cash flowing through the organization effectively.**click to enlarge**Primary KPIs:Working CapitalQuick Ratio / Acid TestCash Conversion CycleVendor Payment Error RateBudget Variance5) CFO DashboardAlso known as the ‘CFO cockpit,’ this powerful CFO dashboard provides a digestible glance at high-level fiscal metrics and essential economic trends. With detailed insights into employee satisfaction and the Berry Ratio, here you will find everything you need as a senior decision-maker to identify emerging trends, make informed organizational decisions, and consistently meet (or even exceed) your profit targets.**click to enlarge**Primary KPIs:Payroll Headcount RatioEconomic Value Added (EVA)Berry RatioEmployee Satisfaction6) Accurate vs Forecast DashboardAt first glance, this financial reporting dashboard offers all the same indicators as an income statement. However, this information is complemented with valuable forecasts for costs and income. Considering the fast-paced nature of the current business landscape, getting an accurate picture of what will happen in the future becomes an invaluable competitive advantage. The dashboard offers insights into 3 key areas: revenue, costs, and net profit. Each of them is depicted with the actual and forecasted value for the last 12 months and the absolute variance in dollars and a percentage. How accurate the absolute difference is will depend on the organization's goals and how close they are to the forecast. However, they still represent an accurate picture to make important decisions about budgeting and other processes.In the lower part of the example, the metrics are broken down by month and compared to the forecast. This is valuable input, allowing us to dig deeper into the data. For instance, the cost breakdown shows all departments stayed within the expected spending, except for marketing. In that scenario, it would be smart to analyze whether those extra costs are justified. **click to enlarge**Primary KPIs: Actual vs Forecast IncomeActual vs Forecast ExpensesWhat Should a Successful Financial Reporting System Include?So far, we have gone through benefits, examples, use cases, and much more valuable information regarding financial reporting requirements and processes. To finalize this insightful guide, we will review some key elements a successful financial reporting system should include. In the past, the tools and techniques used to generate these reports were static, making the process different from today's. Whereas, in the past, report generation required a lot of time and manual work, today, reports are generated with live data that enables businesses to make important decisions in real time. That being said, below, we will present a few key elements to success in today’s modern business landscape. Real-time data: As mentioned, one of the key elements of such a system is the presence of real-time data. Tracking every last detail of your financial performance as soon as it occurs enables you to make strategic decisions that will drive success and significantly mitigate risks. For instance, you can allocate resources smartly based on live trends or control expenses that are not going as planned and might bring negative consequences in the future, among many other things. Predictive analytics is another element that has become fundamental for businesses wanting to extract the maximum potential from their financial data. This technology uses a mix of current and historical data to extract patterns and trends from financial information and generate accurate forecasts about future performance. This helps businesses predict and optimize several processes, such as anticipating future product demand or identifying potential loss drivers, among others. Automation: Traditional financial reporting and analysis requires endless hours of manual work not only on generating the actual report but also on data collection, classification, and analysis. This made the process way less efficient, as by the time a report was finished, its data might not be valuable anymore. That’s why automation has become a key requirement. Being able to automatically generate reports with live data leaves decision-makers enough time to focus on other important tasks while significantly mitigating the risk of human error from manually generating a report. Accessibility and collaboration: For a company’s financial goals to be achieved, it is necessary to involve all departments and relevant stakeholders in the process. This is possible thanks to the level of accessibility and collaboration provided by modern financial analytics software such as datapine. Reports are generated using interactive data visualizations that make the data in them easier to understand for non-technical users. Plus, they can be easily shared in multiple formats to support meetings and discussions.Financial Analysis And Reporting TrendsAs you learned by now, the financial analysis and reporting industry never stops evolving. New technologies and innovations emerge each year to help companies keep up with their competitors and the changing regulatory landscape. To help you stay current, we will discuss the top trends you should be aware of below. Starting with cloud-based solutions. Cloud based-solutions The first, arguably the most important, trend we will discuss is adopting cloud-based solutions. Traditionally, businesses have relied on desktop-based tools to manage their financial data and generate reports. As we mentioned earlier in the post, this was inefficient and subject to critical security issues. With this situation in mind, and mostly due to security concerns, we can expect to see more and more businesses turning to the cloud as a way to improve their data management process with enhanced scalability, security, automation, and real-time updates. The online nature of cloud BI solutions makes it possible for businesses to access their data more easily and collaborate with other stakeholders, improving the quality and accuracy of financial reports. XBRL reportingAccording to Investopedia, eXtensible Business Reporting Language (XBRL) is defined as a “software standard that was developed to improve the way in which financial data is communicated.” It is basically an international standardized language that enables businesses to extract and share human-readable financial data in a format that machines can process.XBRL was born out of a necessity to unify financial data for comparisons and better accessibility. That is why, in the coming years, we can expect regulators to ask businesses to implement XBRL reporting into their financial statements as a mandatory practice. The standard is already being used in over 50 countries, replacing paper, PDF, and HTML-based reports.So, how does XBRL work? XBRL enables businesses to add tags to each data element from their reports within a taxonomy. A taxonomy is a grouping of financial concepts known as "elements." Each element is defined as a concept, and the different relationships between the concepts. Doing so enables regulators and any other user of the data to analyze and compare it easily as all reports will have the same format and tags, making it a global financial language.Sustainability reporting We already talked a bit about ESG reporting earlier in the post, and we can tell you it is one of the most important and fastest-growing trends in the finance world at the moment. The popularity of this trend comes from customers, investors, and regulators increasingly demanding businesses of all sizes take responsibility and accountability for their environmental impact. This involves not only direct damage to the environment but also fair labor, social justice, and ethical governance. In 2024 and beyond, we can expect businesses to complement their financial reports with the different initiatives and goals they are implementing to ensure sustainability and compliance. As more and more laws and regulations come out and more businesses realize that sustainability factors can impact the company’s performance, we will see ESG reporting as a fundamental pillar for success. Artificial Intelligence Artificial intelligence has permeated industries across the globe in the past few years, and finances are no exception. This year, we will see more companies adopt AI into their reporting as a way to automate tasks like data collection, analysis, and report generation. Not just that, but some data analysis software have already implemented AI in the form of intelligent assistants that help organizations extract insights, predictions, and recommendations to help make smart strategic decisions and ensure healthy finances and steady growth. Using artificial intelligence in finances can help make more efficient and accurate decisions at a lower cost and with less manual risk. Your Chance: Want to test a financial reporting software for free? Explore our 14-day trial & take your financial reporting to the next level!So, What Is The Purpose Of Financial Reporting? To reiterate: What is the importance of financial reporting? Thoughts or feelings aside, financial reports will be around as long as businesses are trading.Why? Governments will never stop collecting taxes and commanding compliance. Across sectors, businesses will always need to track their fiscal activities with pinpoint accuracy - and finance data reporting is the best way to do so.In addition to paying taxes and remaining compliant in the eyes of the law, financial reporting tools allow businesses to make their fiscal activities all the more strategic, streamlined, and forward-thinking. In that sense, these tools are both functional and progressive, empowering users to accelerate the growth of their businesses by taking charge of their financial health.While you may not be able to choose if or how you prepare financial reports, you can at least take control of how you present them. With a financial, real-time dashboard, you can see your company’s financial integrity at a glance, empowering you to make better choices while responding to constant change.To get started with finance-based reporting, try our financial analytics software with a free 14-day trial. It’s time to take your business to the next level.Search Blog FOLLOW DATAPINEFacebookTwitterLinkedInRecent Posts29 Supply Chain Metrics & KPIs You Need For A Successful BusinessFeb 21st 2024Supply chain KPIs and metrics that will help you cement the sustainable long term success you deserve.read moreHow Recruitment Metrics & Dashboards Can Help Improve Hiring New CandidatesFeb 19th 2024Improve your understanding of the hiring process, and upgrade your methods by using recruiting metrics and dashboards.read moreThe Importance Of Financial Reporting And Analysis: Your Essential GuideFeb 15th 2024The power, potential, and benefits of financial reporting explained.read moreTags / CategoriesBusiness Intelligence (45)Buzzwords (2)Dashboarding (44)Data Analysis (59)Data Visualization (39)Guest Articles (17)KPIs (32)Market Intelligence (1)News (2)Real World Stats (4)Reporting (50)Technology (6)Follow datapineFacebookTwitterLinkedIndatapine is a RIB Software GmbH solution.Management Board: René Wolf, Tobias Hamacher | Trade Register: Stuttgart, HRB 783426 | VAT ID: DE 812921 551 | D-U-N-S-No. : 329035 468 Vaihinger Straße 15170567 Stuttgart, Germany +49 711 7873-0Financial reporting definition — AccountingTools
Financial reporting definition — AccountingTools
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November 13, 2023
Financial reporting definition
November 13, 2023/
Steven Bragg
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 StatementThe 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 SheetThe 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 FlowsThe 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 EarningsThe 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.Related AccountingTools CoursesNew Controller GuidebookPublic Company Accounting and FinanceThe Interpretation of Financial Statements
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 ReportingThere 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 PerformanceFinancial 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 BudgetSecond, 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 RatiosThird, 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 ComplianceFinancial 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 PartnersIf 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.ManagementThe 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 CreditorsIf 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 circumstances of their customers.CustomersWhen 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.EmployeesIf 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.RegulatorsIn 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.Related ArticlesAccounting ReportsExternal Financial ReportsFlash ReportInterim ReportingInternal ReportingPerformance Report
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Financial Reporting | Definition, Qualities, and Importance
Financial Reporting | Definition, Qualities, and Importance
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Financial Reporting
Written by True Tamplin, BSc, CEPF®
Reviewed by Subject Matter Experts
Updated on June 08, 2023
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Table of Contents
What Does Financial Reporting Mean?
The scope of financial reporting is broader than just reporting information through income statements, balance sheets, authoritative pronouncements, and regulatory rules.
Financial reporting concerns not only monetary information but also non-monetary information.
Financial reporting does not mean reporting information only through income statements and balance sheets.
If crucial information is contained in financial statements, then the reason for its inclusion is communicated through schedules and guiding notes, ensuring that the information is authentic and clear.
The basic objective of reporting information is to ensure that any person (internal or external) using this information can be guided properly when making a decision based on their requirements.
Definition by AICPA
The International Accounting Standards Board (IASB) offers the following definition of financial reporting:
The provision of information about the financial position, performance, and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.
As this definition indicates, financial reporting has a broader scope than simply producing financial statements.
Enterprises pass information to internal and external users through financial statements, along with other details (e.g., schedules and guidance notes), either voluntarily or due to regulatory rules, a tradition, or pronouncements concerning information disclosure.
The reported information is expected to cover not only monetary information but also non-monetary information (e.g., contributions toward social and environmental causes connected with social responsibility).
For example, if a hospital is built to provide free public healthcare facilities, the cost of construction and maintenance expenses are monetary information, whereas the number of patients is non-monetary information.
In fact, decision-makers do not depend purely on monetary information; they also consider non-monetary information to ensure that their decisions are well-informed.
Objectives of Financial Reporting
Financial reporting should be done so that the reported information is realistic, amenable to interpretation, and helps investors to make proper investment decisions.
Financial reporting should satisfy at least two basic objectives:
The reported information should help users to make investment decisions.
The reported information should provide information that users can consider to judge the performance and effectiveness of the enterprise.
Assisting Investment Decisions
Investors seek investments that provide the greatest return in the form of either interest or dividends with an acceptable level of risk.
Investors also expect capital appreciation at least over a reasonable period of time. When making decisions, investors assess an enterprise's earnings potential to estimate their future return in the form of dividends and capital appreciation.
Business information relating to earnings power is assessed based on continuous earnings from operating assets over a reasonable period (e.g., 3-5 years).
Investors compare returns on alternative investments based on risk-return viability. Therefore, the reported information should be realistic and amenable to interpretation, and it should help investors to make proper investment decisions.
Judging Management Effectiveness
The information contained in financial reports should enable users to judge the effectiveness of an enterprise's management based on several factors, including:
Safekeeping of resources and their custody
Efficient and profitable use of resources
Future development plans
Measures applied to avert adverse impacts on the enterprise due to changes in technology or price level (e.g., inflation, deflation, or recession)
Also, management effectiveness depends on information transparency and accountability. It is accountability that determines the effectiveness of an enterprise.
Therefore, the reported financial information should project a realistic and accurate view of the enterprise.
Historical Development
The historical development of financial reporting indicates that many accounting bodies and professional institutes worldwide have made contributions to ensure user-friendliness and that financial reports reflect the changing needs of information users.
Due to this, the objectives of reporting financial information have been increasing by leaps and bounds day by day.
Here, we highlight the objectives of reporting information developed by the American study group, appointed by the AICPA in 1971 and led by chairman Robert. M. Trueblood.
After the study group submitted its report in October 1973, the following objectives of financial reporting were established:
To provide information that is useful for making economic decisions
To serve primarily the users who have limited authority, ability, or resources to obtain information relating to the economic activities of the enterprise
To provide information that is useful to investors and creditors about the potential cash flow of the enterprise to assist decision-making
To provide users with information for predicting, comparing, and evaluating an enterprise's earning power
To provide information relating to resource utilization to judge the ability and effectiveness of the enterprise
To provide factual and interpretive information relating to the enterprise's earnings power and to disclose assumptions made in this regard
To provide a statement of financial position useful for predicting, comparing, and evaluating an enterprise's earnings power.(The events that are part of the incomplete earning cycle and the current and historical costs of the assets and liabilities, along with relative uncertainties, should be disclosed.)
To provide information on factual aspects of an enterprise's transactions that have (or are expected to have) significant cash consequences
To provide information on the net result of the completed earnings cycles and the progress made toward the completion of incomplete earnings cycles
To provide information necessary for financial forecasts
To provide information that is useful for evaluating the effectiveness of resource management in achieving organizational goals
To provide information relating to the activities of the enterprise that affect society which can be determined and described or measured, and which are important to the role of the enterprise in its social environment
The study group's report sets out the objectives of financial reporting in such a way that the enterprise providing such information through financial statements cannot escape the responsibility of accountability.
Qualities
The objectives mentioned above indicate that financial reporting is essential for decision-making among both internal or external users.
This means that the quality of information should be such that it should command wider acceptance and recognition for making information useful.
In this sense, the reported financial information should have the following qualities:
Relevance
Reliability
Understandability
Timeliness
Neutrality
Comparability
Consistency
Materiality
Verifiability
Conservatism
The FASB Concept Statement No. 2 from May 1980, entitled Qualitative Characteristics of Accounting Information, recognizes relevance and reliability as primary qualitative characteristics, while the other characteristics are viewed as ingredients of these primary qualities.
The AAA states that:
To be useful in making decisions, financial information reporting must possess several normative qualities. The primary one is the relevance to the particular decision at hand of the attribute selected for measurement.
The secondary one is the reliability of the measurement of the (relevant) attribute. Objectivity, verifiability, freedom from bias, and accuracy are terms for overlapping parts of the reliability quality.
Other qualities such as comparability, understandability, timeliness, and economy are also emphasized. A set of such desirable qualities is used as criteria for evaluating alternative accounting methods.
If the reported financial information possesses the qualities cited in the above definition, then the information user may attribute different meanings to each of the characters and interpret the information to make proper decisions.
If the business enterprise is honest, sincere, and transparent in reporting financial information, then the quality of information is bound to satisfy the prescribed norms, and one can rely on such information for one's own benefit.
Also, if financial reporting is adequate and reliable, it can be used for the following types of decisions:
Economic decisions, such as those relating to the cost of capital or fluctuations in share and stock prices
Employee decisions, including those concerning job security, promotional opportunities, and bonus declaration
Customer decisions, including continuing supplies of goods, expected valuation in terms of prices of goods, and the robustness of financial institutions to assess present and future solvency
Managerial decisions, such as those relating to operating, financing, and investment decisions
Social decisions, particularly those relating to social and environmental responsibility
Although users may have conflicting views based on their needs, an enterprise is expected to report financial information that serves the general purpose of every user.
If additional information is needed for a specific purpose, it can be furnished in the form of schedules, notes, and specific on-demand information.
However, it is necessary for the reported information in financial statements and annexure to be relevant and reliable.
Importance of Financial Reporting
Crucial information is communicated through financial statements.
The basic objective of reporting information is to facilitate decision-making.
Reported information should cover both monetary and non-monetary information.
There are two basic objectives of financial reporting: first, to help users make investment decisions; and second, to provide information that enables a judgment about the effectiveness of the enterprise to be made.
The objectives of financial reporting have been developed by experts and professional bodies to ensure accountability.
The primary qualities of financial information reporting are relevance and reliability.
Reported information should be adequate and reliable to enable both internal and external users to make decisions.
Financial Reporting FAQs
Why is it important to have a legal framework when reporting financial information?
The main reason is that in most jurisdictions, there are statutory requirements for the preparation of Financial Statements. If a company does not comply with this requirement, it can be prosecuted by its local government.
Compliance with legal and regulatory frameworks ensures the enforceability of statutory rules and regulations .
What are the legal requirements for financial reporting?
There is no single law that covers all aspects of accounting. Each country or region has its own rules and regulations covering different aspects of accounting, financial reporting, auditing, etc.
What is financial reporting?
Financial reporting is the preparation of Financial Statements that communicate information on an enterprise's economic activities and its financial objectives during a specific period.
It provides a range of Cash Flow, performance, and position reports to enable decision-making by investors, creditors, management, and other stakeholders.
What are the main aims of financial reporting?
The main aim is to provide information about an enterprise's financial status and performance in a specific period.
What are the qualities of financial reporting?
The main qualities of financial reporting are reliability and relevance.
About the Author
True Tamplin, BSc, CEPF®
Youtube
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
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How to Write a Great Financial Report? Tips and Best Practices
Reporting
Feb 24, 2022
18 minutes read
Table of contents
To make informed financial decisions in your company, you first have to be, well, informed.
Understanding the financial activity of your company sets the foundation for identifying good business opportunities and making the right decisions to ensure future growth.
By tracking, organizing, and analyzing financial performances, you will have a clearer picture of where the money is going and where it’s coming from. No wonder finance is one of the most monitored and reported operations, according to Databox’s State of Business Reporting.
To stay on top of numbers, companies use financial reports.
Financial reports are formal documents that capture all the significant financial activities within a business in a specific period.
While these reports are extremely useful for you and your key stakeholders, you won’t be the only one reaping the fruits. Financial statements are also examined by potential investors and banks since they provide them with enough insight to determine whether they want to invest in your business.
In this article, we are going to walk you through what financial reports are, why they are significant and show you a step-by-step guide that will take your financial reports and business reporting as a whole, to the next level.
What Is a Financial Report?
What Is the Purpose of Financial Reporting?
What Are the Types of Financial Reporting?
How to Write a Financial Report?
Finance Report Examples
Improve Financial Reporting with Databox
What Is a Financial Report?
Financial reports are official company documents that showcase all the financial activities and performances of your business over a specific period. Usually, they are created on a quarterly or yearly basis.
Every business is legally obliged to use financial reporting to display its current financial status and organize financial data.
The documents are available for public view which means that potential banks and investors will most likely analyze them before they decide to work with you and invest in your business.
They are also important for tracking future profitability estimates, business growth, and overall financial health.
At bottom, financial reports provide you with insight into how much money you have, how much did you spend, and where it is coming from. Based on the data within the report, you can make informed business decisions and create plans for future spending.
The key things a financial report should include are:
Cash flow data
Asset and liability evaluation
Shareholder equity analysis
Profitability measurements
Related: Quarterly Business Review: How to Write One and How to Present It Successfully
What Is the Purpose of Financial Reporting?
Financial reports are used to track, analyze, and display your company’s cash flow.
Understanding how your business is performing from a financial standpoint can seem like an impossible task without these reports.
However, financial reports aren’t used only because they are practical; you are legally required to include them.
Here are some of the main ways in which financial reports can help your business:
Communicate essential data
Monitors income and expenses
Supports financial analysis and decision-making
Compliance
Simplify your taxes
Communicate essential data
Having an insight into the current financial situation of your business is important to each high-ranking member of the company (stakeholders, executives, investors, and partners).
You will use this financial data to create budget plans and monitor the company’s overall performance. When you establish an open communication and transparency policy within your business, you are more likely to attract new investors and enhance funding.
The information communicated in financial statements is what investors rely on when they are assessing risks, profitability, and future returns.
One way to gain the trust of investors is to showcase how your financial performance stacks up against your peers. For example, by joining this benchmark group, you can better understand your gross profit margin performance and see how metrics like income, gross profit, net income, net operating increase, etc compare against businesses like yours.
For example, you can discover that the median gross profit a month for B2B, B2C, SaaS and eCommerce is 73.79K. If you perform better than the median, this might be a good incentive for your investors to increase your funding.
*Important note: Databox Benchmark Groups show median values. The median is calculated by taking the “middle” value, the value for which half of the observations are larger and half are smaller. The average is calculated by adding up all of the individual values and dividing this total by the number of observations. While both are measures of central tendency, when there is a possibility of extreme values, the median is generally the better measure to use.
Benchmark Your Performance Against Hundreds of Companies Just Like Yours
Viewing benchmark data can be enlightening, but seeing where your company’s efforts rank against those benchmarks can be game-changing.
Browse Databox’s open Benchmark Groups and join ones relevant to your business to get free and instant performance benchmarks.
BROWSE BENCHMARK GROUPS
Monitors income and expenses
Financial reporting involves tracking incomes and expenses for a specific time period. To establish efficient debt management and budget allocation, you will need an insight into the most important spending areas.
By tracking income and expenses, you will also understand current liabilities and assets. Analyzing financial documentation will provide you with a bigger picture regarding the key metrics such as debt-to-asset ratios that investors use to calculate potential profitability.
All of this is information is crucial for staying ahead of your competitors.
Related: How to Write a Great Business Expense Report: A Step-By-Step Guide with Examples
Supports financial analysis and decision-making
The performance analysis in financial reports is what you rely on to make better business decisions.
Considering the different data that financial reports include, you can check out real-time information regarding historical performances, key spending areas, and use them to create accurate financial forecasts.
Implementing detailed financial analysis and using developed data models can help any business better evaluate current activities and make future business growth decisions.
You will be able to recognize trends, potential problems, and stay on top of your financial performances in real-time. This sets the foundation for quick and accurate economic decisions.
Compliance
The main purpose of financial reports is to make sure your business is in compliance with the law and regulations of government agencies.
Regulatory institutions examine every document that evaluates the financial activities of your company. This is why making accurate financial documentation is crucial for the well-being of your business.
Aside from accuracy, you will also have to follow certain deadlines that these institutions set. This sometimes causes pressure in accounting departments to create complex financial reports quickly and accurately, which is why regular bookkeeping is immensely important.
In the US, private and public companies have to be compliant with the GAAP (Generally Accepted Accounting Principles), while international companies mostly report under the IRFS (International Reporting Financial Standards).
Both of these organizations provide some standard guidelines but there are a few differences you will have to pay attention to when creating your financial statements.
Simplify your taxes
No matter how big or small your business is, doing taxes can be a stressful task.
By creating accurate financial reports, you can make tax calculation a lot easier since you will minimize any chances of error and save time by including all financial data in one document.
Not only that, since financial reports are a legal requirement, the IRS uses them to evaluate the tax income of each individual company.
Additionally, with the introduction of Making Tax Digital (MTD) in many countries, including the UK, it is now mandatory for businesses to maintain digital records and submit tax returns digitally. This means that accurate financial reports are more important than ever, as they will be used to populate the required digital tax submissions.
What Are the Types of Financial Reporting?
While financial reports all have the same goal, there are a few different types that you should know about.
This isn’t only a matter of compliance or best practice, these reports are key for understanding the different segments of cash flow.
Here are the main types of financial reporting:
Balance Sheet
Cash Flow Statement
Income Statement
Shareholder Equity Statement
Balance Sheet
A balance sheet is a financial statement that tracks the total amount of assets, liabilities, and shareholder equities within your company. They also provide you with a real-time evaluation of asset liquidity and debt coverage.
Most companies create balance sheets on a quarterly basis and include the data from each quarter in the annual report.
When creating a balance sheet, there is an asset page (includes available cash, equipment value, inventory value, etc.) and a liability page (includes accounts payable, credit card balances, bank loans, etc.) that you need to fulfill.
Once you total these assets and liabilities, you will subtract liabilities from the assets. The amount you get is what is called ‘owner’s equity’.
Cash Flow Statement
This is a financial statement that records all the different cash flow activities in the company.
Cash flow statements track cash generated and cash spent amounts in a specific time period. This report is crucial for measuring whether companies generate enough cash to cover their debts. Also, it provides insight into fund operations, investments, and the overall activities that are generating revenue.
This statement is helpful for investors since they can use it to determine whether your business presents a good investment opportunity.
While balance sheets incorporate certain calculations to determine financial values, cash flow statements are consisted of three main elements:
Operational activities – inventories, wages, tax income, accounts receivable, accounts payable, and cash receipts
Investment activities – investment earnings use, investment earnings generation, asset sales, issued loans, payments from mergers
Financing activities – payable dividends, debt payments, debt issuance, cash from investors, and stock repurchases
Income Statement
The income statement records the company’s expenses, revenue, and net loss/income over a specific time period.
Balance sheets focus on the current activities and performances while income sheets track them over a longer period. Businesses tend to track income statements each quarter to gain better insight into the different financial processes that occur.
Income statements include profits and losses, which is why they are also called P&L statements (Profits & Losses).
The main elements included on the income statement are:
Operating revenue – financial data regarding sales of products or services
Net and gross revenue – includes the total sales revenue and remaining revenue (after the cost subtraction)
Primary expenses – these include general costs, administrative costs, depreciation and selling, and COGS (cost of goods sold)
Secondary expenses – capital loss, asset loss, debt interest, and loan interest
Nonoperating revenue – this is revenue that comes from accrued interest, it includes investment returns, capital gains, and royalty payments
Shareholder Equity Statement
Even though shareholder’s equity is usually included on the balance sheet, larger companies tend to report these activities on a separate statement.
This statement tracks the amount of money key stakeholders invest in the business. The investments most commonly include company stocks and securities. After dividends are released to stockholders, the retained earnings in the company change.
Stakeholder equity statement includes these key components:
Retained earnings after dividends and losses have been subtracted
Common/preferred stock sales
Purchased treasury stock
Generated income (including the income that comes from unrealized capital gains)
Pro Tip: How to Stay on Top of the Financial Health of Your Business
Do you own and manage a small business? Then you know how much of a struggle it can be to stay on top of the financial health of your business on a daily basis. Now you can pull data from QuickBooks and HubSpot’s CRM to track your key business metrics in one convenient dashboard, including:
Open deals and deal amounts by pipeline stage. Get sales data directly from your HubSpot CRM and track deals, deal amounts, deal stages, and dates from your sales pipeline. Key financial data. Track gross profit margin, open invoices by amount and by customer, paid invoices, expenses, and income from QuickBooks.
Now you can benefit from the experience of our HubSpot CRM and QuickBooks experts, who have put together a plug-and-play Databox template that helps you monitor and analyze your key financial metrics. It’s simple to implement and start using, and best of all, it’s free!
You can easily set it up in just a few clicks – no coding required.
To set up the dashboard, follow these 3 simple steps:
Step 1: Get the template
Step 2: Connect your HubSpot and Quickbooks accounts with Databox.
Step 3: Watch your dashboard populate in seconds.
Get the template free
How to Write a Financial Report?
Financial reports help you understand your company’s financial performance, attract potential investors, and are legally required. This is why you have to make sure that they are as accurate as possible.
You want your financial reports to be comprehensive, understandable, and precise.
Even though creating a good financial report can be very complex, we are going to show you a step-by-step guide that will make the whole process much easier.
Follow these steps to create a great financial report:
Step 1 – Make a Sales Forecast
Step 2 – Create a Budget for Expenses
Step 3 – Create a Cash Flow Statement
Step 4 – Estimate Net Profit
Step 5 – Manage Assets and Liabilities
Step 6 – Find the Breakeven Point
Step 1 – Make a Sales Forecast
When making a sales forecast, the first thing you should do is create a spreadsheet that includes your sales performance from the last three years.
Use a specific section for each line of sales and organize columns for each month of year one. For years two and three, organize columns on a quarterly basis.
Create three different blocks – one for pricing, one for unit sales, and the third one for multiplying units by unit cost (to calculate the cost of sales).
Cost of sales is important because it helps you calculate a precise gross margin.
Once you do the math, you can make an accurate sales forecast that is backed up by historic financial data.
PRO TIP: If you are using HubSpot CRM to visualize your sales data, watch the video below to learn how to set up and track your HubSpot CRM data in order to more accurately forecast your sales this month, quarter, and beyond.
Step 2 – Create a Budget for Expenses
Once you have made a sales forecast, you will want to calculate how much it will cost you.
When creating an expense budget, you should include both fixed costs (rent, payroll, etc.) and variable costs (marketing and promotional expenses). Costs such as interest and taxes can’t be completely accurate, so you are going to have to make rough estimates.
For taxes, you can multiply the estimated debt balance by your estimated tax percentage rate.
To estimate interest, multiply your estimated debt balance by an estimated interest rate.
Step 3 – Create a Cash Flow Statement
We already mentioned what cash flow statements are and why they are so important for your business. They are typically created based on the sales forecast, balance sheet components, and other estimates.
To make cash flow estimates, companies should use historical financial statements. If your business is relatively new, you should project cash flow statements by breaking them down into 12 months.
Your way of invoicing is also linked to cash flow estimates.
For example, if a customer has the right to pay for your services after 30 days, the cash flow statement will show that you only collected 80% of your invoices within the month (while you need 100% to cover the expenses).
Step 4 – Estimate Net Profit
To estimate net profit, you should use the numbers from your sales forecast, expense estimates, and cash flow statement.
You can calculate the net profit by subtracting expenses, interests, and taxes from the gross margin.
This step is extremely important since it serves as a profit and loss statement that helps you create a detailed business forecast for the next three years.
Step 5 – Manage Assets and Liabilities
In order to estimate your business’s net worth at the end of a fiscal year, you have to be able to manage assets and liabilities that won’t be shown in the profits and loss statement.
Come up with a rough estimate of how much money you expect to have on hand each month and include accounts receivable, inventory, land, and equipment.
After that, calculate liabilities, debts from outstanding loans, and accounts payable.
Step 6 – Find the Breakeven Point
You know that you have found a breakeven point if your business expenses are in line with the sales volume.
The three-year income estimation should help you acquire this analysis. In viable businesses, the total revenue should exceed total expenses.
For potential investors, this kind of information is crucial since they want to be reassured that they are investing in a company with steady growth.
Finance Report Examples
Nowadays, most companies use different tools and templates to make their reporting process easier. Using dashboards can help you track the metrics you obtain from the financial management tools that your business integrates.
Databox offers pre-built financial templates that can help you track the most important financial metrics in one place.
With our comprehensive dashboards, you can follow the most significant numbers and later include them in your financial report, making the whole process less time-consuming.
We understand that each business is different, which is why you can also customize the reports in any way you deem fit and at any time.
Here are some of our most popular financial reports that you can try out:
Quickbooks Profit and Loss Overview Dashboard
Xero Profitability Overview Dashboard
Stripe (MRR & Churn) Dashboard
Profitwell Revenue Trends Dashboard
PayPal (Account Overview) Dashboard
QuickBooks Profit and Loss Overview Dashboard
To gain valuable insight into the sales and expenses that incur in your business, you can use the QuickBooks Profit and Loss Overview Dashboard.
Make sure you are staying on top of your numbers by tracking monthly, quarterly, and yearly income. Also, this report will help you figure out how profitable your company is and which areas may need to be fixed.
Some of the key metrics you can follow are net profit, income by month, expenses by month, and profit margin.
Profit and Loss Dashboard Example
Xero Profitability Overview Dashboard
Xero is one of the most popular accounting systems that companies use to manage their financial positions. However, it can sometimes be hard to organize the large amount of data this tool provides.
This is where the Xero Profitability Overview Dashboard can come in handy. This customizable template will provide you with a comprehensive view of the sales and expenses that go into your Xero system.
Once the time comes for creating a financial report, you can simply integrate the data you gathered in this dashboard.
The key metrics it includes are net profit, income by month, expenses by month, profits, losses, gross profit, and other income.
Profitability Overview Dashboard Example
Stripe (MRR & Churn) Dashboard
Use the Stripe Dashboard to monitor your churn rate and track MRR growth in real-time. Also, you can check how many customers your business currently has at any given time.
Once you connect your Stripe account to this template, you will be able to answer these questions:
How much money did I make through sales today?
How can I track my MRR (Monthly Recurring Revenue)?
How many active customers do we have?
How much revenue did I lose from churned customers?
Some of the metrics you can visualize are churn rate goal, customer churn rate, gross volume, revenue churn, and customers.
MRR & Churn Dashboard Example
Profitwell Revenue Trends Dashboard
Profitwell Revenue Trends Dashboard allows you to monitor all the incoming sources of revenue for your SaaS business and keep track of the important churn metrics.
You can use this free template to see how fast your business is growing. The SaaS metrics will all be located in one comprehensive dashboard and you can visualize all the data with only one click.
Also, you can compare revenue from upgrades and downgrades and investigate your churn ratio revenue.
Revenue Trends Dashboard Example
PayPal (Account Overview) Dashboard
The PayPal Account Overview Dashboard is extremely useful for bigger companies who want to have a clear overview of their payments, refunds, sales, and other key metrics that your business relies on.
Connecting your PayPal account to the template can be done in a matter of minutes and you will get the answers to questions such as:
How can I track gross sales?
What is the best way to calculate net sales?
How much did I spend on PayPal fees in the previous month?
How can I check my PayPal account balance?
How much money was returned through refunds last month?
PayPal Dashboard Example
Streamline Financial Reporting with Databox
Since the financial reports you create will be examined by both government agencies and potential investors, you will want to make sure that they are top-notch.
However, the reporting process can sometimes feel a bit overwhelming and you will face a lot of pressure trying to create the perfect report.
Databox can help relieve this stress and enhance your financial reporting skills.
No matter if you create these financial statements quarterly or annually, you will end up with a handful of data to analyze. With financial reporting software such as Databox, this analysis process will become both simpler and quicker.
With our customizable dashboards, you can visualize all the most important data and gather it in one place. Aside from being visually pleasing, your reports will also be much more engaging and minimize any chances of error since the information will be imported directly from your financial management tools.
To satisfy both your company’s key stakeholders and potential partners, you can sign up here for a free trial and put your financial reporting on autopilot.
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