The Importance Of Financial Reporting And Analysis

1. The Importance Of
Financial Reporting And
Analysis
SUBMITTED BY- YASHIKA GUPTA

2. What Is Financial Reporting?
 Financial reporting refers to standard practices to give stakeholders an
accurate depiction of a company’s finances, including their revenues,
expenses, profits, capital, and cash flow, as formal records that provide in-
depth insights into financial information.
 Each of these financial KPIs is incredibly important because they
demonstrate the overall ‘health’ of a company – at least when it comes to
the small matter of money. These types of KPI reports don’t offer much
insight in the way a company’s culture or management structure, but they
are vital to success, nonetheless.

3. Definition
 Financial reporting may be defined as communication of published
financial statements and related information from a business enterprise to
third parties (external users) including shareholders, creditors, customers,
governmental authorities and the public. It is the reporting of accounting
information of an entity (individual, firm, company, government
enterprise) to a user or group of users.
 Company financial reporting is a total communication system involving
the company as issuer (preparer); the investors and creditors as primary
users, other external users; the accounting profession as measurers and
auditors; and the company law regulatory or administrative authorities.

4. 3 Common Types Of Financial
Reporting
1) Income Statement
 This particular report 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.

5. 2) Balance sheet
 This piece of financial reporting software offers a snapshot of your assets
and liabilities (aka debts) at a given moment in time. It’s definitely 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,
your strategic decision-making.

6.  3) Cash Flow Statement
 This report shows how much money flowed into and out of your business
in a period of time. The cash flow statement is crucial for things like
making sure you have enough money to make payroll.

7. The Purpose of Financial Reporting
 Financial reports are the documents and records you put together
to track and review how much money your business is making (or not).
The purpose of financial reporting is to deliver this information to the
lenders and shareowners (the stakeholders) of your business.
 If someone else is supporting part of your business, financial reporting
must be part of the essential contract between you and them. Your
lenders and investors have the right to know if their money is being spent
wisely and returning a profit.

8. The Purpose of Financial Reporting
 Financial analysis and reporting are one of the bedrocks of modern
business.
 Utilizing financial data with the help of online data analysis tools allows
you to not only share vital information both internally and externally but
also leverage metrics or insights to make significant improvements to the
very area that allows your business to flow.

9. Objectives of Financial Reporting:
 An evaluation of company financial reporting requires some agreement on its
objectives. Financial reporting is not an end in itself but is a means to certain
objectives.
 The objectives of financial reporting and financial statements have been discussed for
a long time. While there is no final statement on objectives, to which all parties (of
financial reporting) have agreed, some consensus has been developing on the
objectives of financial report
 At present, the following may be described as the primary objectives of financial
reporting:
 (а) Investment Decision-making.
 (b) Management Accountability.

10. (a) Investment Decision-Making:
 The basic objective of financial reporting is to provide information useful
to investors, creditors and other users in making sound investment
decisions. These decisions concern the efficient allocation of investment
funds and the selection among investment opportunities.
 It is essential to have an understanding of the investment decision
process applied by external users in order to provide useful information
to them. The investors seek such investment which will provide the
greatest total return with an acceptable range of risk. Investment return is
comprised of future interest or dividends and capital appreciation (or
loss).

11.  The investors while making investment decisions aim to determine the
amount and certainty of a company’s future earning power in order to
estimate their future cash return in dividends and capital appreciation.
 The investment decision process may be pictured as a three-legged stool.
 One leg is the analysis of the company and its securities and of the
industry in which it operates.
 The second is the assessment of the economic environment, including the
the business outlook, financial markets and interest rates, international
trade and finance, and political and regulatory developments.

12.  The third is the portfolio decision in which these two streams of
information are integrated into an investment appraisal related to the
objectives of the investor—individual or fund.
 Portfolio decisions sort out expected rates of return relative to risk, as the
investor (portfolio manager) seeks that combination of securities which
produce the highest total return available within the risk constraints
adopted for the portfolio. In this continual winnowing process,
funds tend to flow toward the most favorably situated companies and
industries and away from the weaker and less promising areas.

13.  Investment decision and investment values, both, are comparative, not
absolute. In all investment decisions, comparison is made in order to
determine the most attractive (greatest) returns in relation to risk first,
comparison between one type of security us. another; second, comparison
between one company vs. another within each category; third, comparison
within a company over time.
 Comparison requires uniform standards of measurement. Where different
accounting measurements are used in similar situations, investors and financial
analysts make their own accounting adjustments to achieve comparability,
provided adequate information is available to do so.
 But the attribute of comparability can be achieved at a lower cost (associated
with financial reporting system), and with equal benefit for all investors, by
eliminating the alternatives.

14. (b) Management Accountability:
 A second basic objective of financial reporting is to provide information
on management accountability to judge management’s effectiveness in
utilizing the resources and running the enterprise.
 Management of an enterprise is periodically accountable to the owners
not only for the custody and sale-keeping of enterprise resources, but
also for their efficient and profitable use and for protecting them to the
extent possible from unfavorable economic impacts of factors in the
economy such as technological changes, inflation or deflations.

15.  Management accountability is of very great interest not only to existing
shareholders and other users but also to potential shareholders, creditors
and users. A company generally offers shares, debentures etc., to the
prospective investing public and therefore it should accept accountability
responsibilities to prospective investors also. Certainly annual and other
financial statements is intended to play a major role in this regard.
 The management accountability concept includes information about future
activities, budgets, forecast financial statements, capital expenditure
proposal etc. Accountability is beyond the narrow limits of companies’
regal responsibilities to shareholders (and sometimes debenture-holder
and creditors).

16.  It obviously includes the interests of persons other than existing
shareholders. Management is accountable for the values of assets as well
as for their costs. In this way, the financial statements not only inform but
also protect the various interests of the shareholders and other users.

17. The Benefits Of Financial Reporting
 Improved debt management: As you will surely know, debt can cripple
the progress of any company, regardless of sector. While there may be
many different types of financial reporting concerning purpose or
software, almost all solutions will help you track your current assets
divided by the current liabilities on your balance to help gauge your
liquidity and manage your debts accordingly.
 Trend identification: Regardless of what area of financial activity you’re
looking to track, all types of 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 the kind of improvements
that will benefit the overall health of your business.

18.  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 your liabilities is a critical part of your company’s
ongoing financial health. Business loans, credit lines, credit cards, and
credit extended from vendors are all integral liabilities to manage.
 Progress and compliance: As the information served up by financial
reports 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.

19. 3 Different Ways Of Financial
Reporting And Analysis
 The GAAP (Generally Accepted Accounting Principles). This is the system
used by the United States, 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 around the world, 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, 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.

20. Why Is Financial Reporting Important?
 The importance of financial reporting cannot be over emphasized. It is
required by each and every stakeholder for multiple reasons & purposes.
The following points highlights why financial reporting framework is
important –
 In help and organization to comply with various statues and regulatory
requirements. The organizations are required to file financial statements
to ROC, Government Agencies. In case of listed companies, quarterly as
well as annual results are required to be filed to stock exchanges and
published.
 It facilitates statutory audit. The Statutory auditors are required to audit
the financial statements of an organization to express their opinion.

21.  Financial Reports forms the backbone for financial planning, analysis,
benchmarking and decision making. These are used for above purposes by
various stakeholders.
 Financial reporting helps organizations to raise capital both domestic as
well as overseas.
 On the basis of financials, the public in large can analyze the performance
of the organization as well as of its management.
 For the purpose of bidding, labor contract, government supplies etc.,
organizations are required to furnish their financial reports & statements.

22. Conclusion
 So we can conclude from the above points that financial reporting is very
important from various stakeholders point of view. At times for large
organizations, it becomes very complex but the benefits are far more than
such complexities. We can say that financial reporting contains reliable and
relevant information which are used by multiple stakeholders for various
purposes. A sound & robust financial reporting system across industries
promotes good competition and also facilitates capital inflows. This, in
turn, helps in economic development.