What is financial reporting? The traditional function of financial reporting was to provide business owners with information about the companies that they owned and operated. Once the delegation of managerial responsibilities to hired personnel became a common practice, financial reporting began to focus on stewardship—that is, on the managers’ accountability to the owners.
Its purpose then was to document how effectively the owners’ assets were managed, in terms of both capital preservation and profit generation. This is a system of presenting financial data of a company’s position, operating performance, and funds flow for an accounting period. Financial statements along with related information may be contained in various forms for external party use such as in the annual report, SEC Form 10-K, and prospectus.
If “accounting is the language of finance” (Lasher, 2008, p. ) then financial reporting is the “communication of financial information useful for making investment, credit, and other business decisions” (Wild, Shaw, & Chiappetta, 2009, p. 681) Such communications include general purpose financial statements such as income statements, balance sheets, equity reports, cash flow reports, and notes to these statements. Additionally, items such as SEC filings, press releases, meeting minutes, and auditor’s reports are also included in financial reporting (Wild, Shaw, & Chiappetta, 2009, p. 681).
Many financial reports, or the accounts and data they represent, are subject to various regulations and standards from organizations such as the Securities Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and the International Accounting Standards Board (IASB) (Wild, Shaw, & Chiappetta, 2009, p. 9). Much like any language, financial statements could have their own “dialect” so to speak. For example, knowing about the use of cash-based accounting versus accrual based accounting could impact some very serious business or investment decisions.
The various regulations, standards, and Generally Accepted Accounting Principles (GAAP) helps to make sure we’re all on the same page. In the broad sense of the term, everyone uses financial reports! We all receive receipts when we make purchases from stores and we all receive bills. In a sense, these are both financial reports that communicate to us the status of our accounts or individual transactions. When we focus on business, however, we can more easily focus on managers, investors, creditors, and even the government.
Managers use financial reports to make business decisions. For example, if a manager of a manufacturing firm saw from internal financial and inventory reports that product returns were high then that manager might push for increased quality control. Investors and potential investors alike use general-purpose financial reports so frequently that companies often release them together in a bundle called “investor reports,” “annual reports,” or “shareholder reports. Investors would use this information to help make a decision about whether they will buy, sell, or hold onto a particular company’s stock. Another large group of people who use financial reports are creditors.
A creditor would use financial reports to determine their risk in loaning money to a particular company. Goal of presenting useful information to financial statement users so that proper decisions can be made. Data presented should be comprehensive so that a good understanding of the entity’s activities is possible.
Financial information should aid in the evaluation of the amounts, timing, and uncertainties of cash flows. Also, financial reporting should furnish information about the firm’s economic resources, claims against those resources, owners’ equity, and changes in resources and claims. Financial reporting should provide information about financial performance during a period and management’s discharge of its stewardship responsibility to owners. It should likewise be useful to the managers and directors themselves in making decisions on behalf of the owners