Financial reporting refers to the exposure of the company’s finance to the stakeholders. These stakeholders are creditors, investors, the public, etc. The company’s finance report shows taxes, costs, and profits after a definite period. For this reason, you come to know the health of a firm. It does not offer more insight, though, but it is vital for a company’s success.
The main parts of a financial report are:
- The final statements
- Notes to financial statements
- Quarterly and Annual Reports (listed company)
- Prospectus
- Management Discussion and Analysis (Public Company)
Ways of Financial Reporting
There are three ways to make financial reports:
The GAAP: GAAP is the set of book-keeping rules, and in the USA, SEC follows it. This system makes sure that the report is clear.
The IFRS: More than 110 countries use this system. The countries include Canada, China, and many others.
This system gives a global voice to business matters. Therefore they become easy to read internationally.
The GDPR: This system has a new set of rules and started on May 25, 2018. The new rules give safety to a person’s private matters.
Also, it assures that financial reports must compliant when they got sensitive data.
Uses of Financial Reporting
Financial Reporting is the need for every firm, and the stakeholders want it for many reasons. Let us see the benefits of financial reports:
Decision Making: Financial reports are a great tool to make decisions. They show all the changes that can affect the cash flow. So, you get to know how the firm collects the cash. You can make better decisions by analyzing the condition by the report.
Credit: Every business needs to lend money at any stage. So, with the help of the report, the creditor knows how much money you owe already. In short, financial reporting shows an actual image of a firm.
For Customers: It keeps the clients updated about the firm’s growth. Hence, it helps to build the client’s trust level.
Track Weakness: You can track any financial activity with the report. Thus, it helps you to tackle all potential defects by just a look. As a result, you can upgrade the health of your firm.
For Management: Financial reporting is helpful for management, as well. It can analyze the report and make better decisions for the company.
For Investors: As a report depicts the performance of a firm, the investors can make rational investment, credit, etc.
Company’s status: It helps to find where the company stands after a certain period. Hence, you find details about an increase in sales, market share, and profit.
Legal Demands: A company has to file a report to agencies like ROC, state, etc. So, financial reporting is useful in this respect.
Use of Resources: By report, the company manages the use of resources in the best way.
Verdict
In short, financial Reporting has all the reliable data about the firm. As a result, stakeholders can use the data for many plans. Also, financial reporting aids capital inflows and brings good competition.
See also: Financial Risks
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