Question

What role does financial reporting play in the decision making process of the organization?

Answer 1

Following are the main areas where financial reporting helps decision-making:

a. It provides investors with a baseline of analysis for, and comparison between the financial health of securities issuing corporations. (Investing Decisions)

b. It helps creditors assess the solvency, liquidity, and creditworthiness of businesses. (Lending Decisions)

c. Along with its cousin, managerial accounting, it helps businesses make decisions about how to allocate scarce resources. (Resource Allocation)

d. Corporate Governance - to meet legal and regulatory obligations outlined for companies. Companies must be honest about their financial activities and the data must be accurate and published regularly.

Importance of Financial Reporting

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 –

1. In helps 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.

2. It facilitates statutory audit. The Statutory auditors are required to audit the financial statements of an organization to express their opinion.

3. Financial Reports forms backbone for financial planning, analysis, bench marking and decision making. These are used for above purposes by various stakeholders.

4. Financial reporting helps organizations to raise capital both domestic as well as overseas.

5. On the basis of financials, the public in large can analyze the performance of the organization as well as of its management.

6. For the purpose of bidding, labor contract, government supplies etc., organizations are required to furnish their financial reports & statements.