To make functioning of economy more transparent and minimize risk, financial reporting principles have been laid down by authorities like The Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB).
These financial reports must comply with the guidelines laid in Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). It is hence crucial for every firm to present financial report for ensuring proper relations with investors and government financial departments.
Business Enterprises and Financial Reporting
Large corporate houses and firms generate profits to the tunes of billions. So far, so good. Not only such firms are major players for the economy, they also hold the trust of government and millions of investors.
Timely presentation of financial statements and financial reports ensures that investors as well as government is aware of the company's economic well-being. A financial report has several objectives that have been laid down further.
Know About the Cash Flows
In an attempt to sell its services, manufacture products, a firm has to participate in liquidity activities. In this regard, cash inflows (receipts) and cash outflows (payments) are important tools to measure the investing activities of a firm. By looking at cash flows that the firm is engaged in, an investor can use his sense of judgment to invest in it.
Cash flows also give a good account of firm's working capitals. Working capital, as a financial metric, determines a firm's current assets. While fixed assets play a major role in operating liquidity, net working capital equals current assets minus current liabilities.
Analyze Profit Potential of the Firm
One of the major aims of financial reporting is to analyze the profit potential of a firm. A firm that consistently shows failure to generate profits risks failure in near future.
In financial reports, firms mention statement of income, that contains records of firm's gains, losses, earnings, revenue and expenses. By going through such report card of a firm's quarterly, half-yearly or annual performance, investors can make wise decisions.
Know About the Financial Health
Both The Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB), expect management of firms to present quarterly or annual data about the company's financial health. Well structured balance sheets with additional information as foot notes are integral part of business practice.
Assets, liabilities and owner's capital - these three vital components of financial analysis give great insights to business partners, customers, lenders, suppliers and other people associated to the business to estimate the financial health of these firms.
Providing everyone related to business, authentic information regarding revenue, growth and losses are one of the most important financial reporting aims, established by state and local governments.
It is important to understand that any accounting information is only important if it helps investors to make good decisions regarding financial growth of the company. Relevance of the financial reports is also very important as it helps investors to make informed decisions.
One of the most important goal of financial reporting is reliability of information submitted by a company. In the recent years, frauds and misrepresentation of information regarding financial statements of many companies has caused quite a lot of losses to investors and to the government.
Financial reports must be expressed in simple terms, by using less jargon and terminology that a large number of people can understand. If not so, financial reports must consist of explanations and interpretations that can help investors to understand complexities of the financial information provided.