What Is the Objective of Financial Reporting?
If you own or invest in a business, you know that companies produce financial reports at least once a year. But do you know what they’re telling you? Different types of reports exist that can tell you different things. However, the overall objective of financial reporting is to provide information about the finances of a company while complying with regulations.
Financial reporting is vital for both private and public companies because it reveals the strengths of an organization to business owners and investors. It also keeps interested parties apprised of weaknesses in business and alerts them to other possible business troubles.
What is Financial Reporting?
Financial reporting provides information about a company’s financial health. Accountants and finance personnel produce these reports following generally accepted accounting principles (GAAP). In some cases depending on your business, auditors review the financial reports before reporting finance positions to owners and stockholders.
Publicly-held companies must also file these financial reports with the Securities and Exchange Commission (SEC), which regulates and monitors the securities market for the government.
Definition of Financial Statements
There are three primary types of financial statements: Balance Sheet, Income Statement, and Statement of Cash Flows. All three contain useful information and must meet certain accounting standards and principles.
These statements also serve as a company’s financial record, which a stakeholder or lender can analyze and compare to similar organizations in your industry to understand the health of your business or even to decide if they want to lend you money or invest in your company.
Cash Flow Statement Objectives
The Statement of Cash Flows shows the inflows and outflows of cash within an organization. In particular, it breaks down activities, by type, that bring in cash and activities that use cash.
For example, this statement tells an investor the amount of cash generated and spent during the operations of a business over a set period of time. Using this information, you can see how much money comes from sales and commissions and how much a company pays for supplies and other types of expenses.
This information can reveal problems in how someone is running their business and can give clues as to where improvements can be made.
Other categories typically separated in this financial statement are investing activities and financing activities.
Balance Sheet Objectives
This financial statement is a snapshot-in-time of a business’s assets, liabilities, and owners’ equity. The balance sheet tells investors where a company stands at a particular period in time. This information is helpful not only to see what the company has in assets and liabilities but also for comparison purposes from prior periods.
Another objective of the balance sheet is for investors and owners to know what the company is worth.
To understand this document, you have to know a basic accounting principle, which is that “assets equal liabilities plus owner’s equity.”
Remember, this statement covers only where a company stands at a particular point in time.
Income Statement Objectives
You can’t define financial statements without mentioning this key financial report. The income statement shows revenues and expenses over a financial accounting period.
One of the objectives is to show net gains and losses resulting from business operations and activities over a set date range. Most companies prepare an income statement on a monthly basis.
This statement is one of the most widely used forms of financial reporting for investors.
Keep in mind that using this statement to make business decisions without looking at the other financial reports is a mistake many people make. Since the objectives of financial statements differ depending on the report, it’s best to analyze them all before investing.
Objectives of Financial Reporting
The main objective of financial accounting and reporting is to give information about the financial performance and position of a company. Management will use this information to analyze the company and plan for the future.
Investors can also use this information to decide if the company might be a good investment and determine if a business is in financial trouble. Since financial accounting requires companies to use accounting standards to generate these reports, they have consistency across industries.
Why Financial Reporting is Important
Financial reporting is essential for owners, employees, and investors alike. Without financial accounting and financial reports, you would have no way of knowing the well-being of your business, nor would you have a way to grow effectively. As a result, without these practices, you wouldn’t see the early signs of trouble.
In addition, investors would have no way of knowing if they might or might not be making a sound investment with their money.
Besides the company’s health and investment benefits to financial reporting, here are some other reasons why it’s essential. Financial reporting:
- Helps the government regulate companies and practices
- Opens the door for easy auditing
- Assists in financial analysis and planning
- Shows how well management is performing and the strength of your team
- Gives a clear business picture to obtain contracts and win bids
Once you understand how the reports can help you learn about a business, you can read any financial report from any company because they are standardized.
Information You and Your Investors Need
There are many reasons why the best accounting standards and practices are essential in financial reporting for a company. Whether you are an investor or an owner of a business, the systematic and standard analysis of financial reports is a must. They provide information that’s vital to you and your stakeholders.
These periodic documents serve specific purposes in analyzing, regulating, investing, growing, and planning for all businesses, big and small. Once you understand financial statements, you will be able to use them to make better-informed decisions.
Contact Us at CFO Strategies
If you’re having trouble making sense of your financial statements, we at CFO Strategies can help. We are a team of certified public accountants (CPAs) and other financial experts who can assist you in understanding the health of your company.
Our team can enable you to make educated decisions based on real data and steer your company in the right direction. Call us at CFO Strategies today at 732-236-4454.