TASK
within the broad framework of Financial Reporting,
(i) Analyze any accounting issue/topic of your choice
(ii) the issue/topic can be empirical or theoretical, related to general purpose financial reporting
The Importance Of Financial Reporting And Analysis
Financial analysis and reporting are one of the bedrocks of modern business.
While you may already know that financial reporting is important (mainly because it’s a legal requirement in most countries), you may not understand its untapped power and potential.
Let us expllain the following topics:-
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.
As Boundless states, “Financial reporting is used by owners, managers, employees, investors, institutions, government, and others to make important decisions about a business.”
The Benefits Of Financial Reporting
We’ve pondered the question ‘why is financial reporting important?’, looked at real-world use cases, and shared what we consider to be the financial reporting meaning. To round things off, let’s dig deeper into the benefits of this kind of reporting.
3 Different Ways Of Financial Reporting And Analysis
Right now, it’s enough to understand that there are two main ways that financial reports are standardized, and one critical element to consider when working with EU-based data of any kind:
Why Is Financial Reporting Important?
Let’s get down to brass tacks – what’s the point and the role of financial reporting?
Well, there are three main factors:
To further illustrate the importance of financial statement analysis, let’s dive into each of these three primary reasons a little more thoroughly.
1) Taxes
You may have heard the phrase: the only two certainties in this world are death and taxes (or something similar).
That said, taxes are arguably the biggest reason for the importance of financial statement analysis – basically, you have to use it! The government utilizes such reports to ensure that you’re paying your fair share of taxes. If financial reports weren’t legally required, most companies would probably use management dashboards instead (at least for internal decision-making purposes).
The government’s requirements for these documents has created an entire industry of auditing firms (like the “Big 4” of KPMG, Ernst & Young, Deloitte, and PWC) that exist to independently review companies’ financial reports. This auditing process is also a legal requirement.
2) For other companies, investors, shareholders, etc.
If you’re considering investing money in a company, it only makes sense that you’ll want to know how well that company is doing – according to a standardized litmus test; not measurements that a company has fabricated to make themselves look good.
This is where the importance of financial statements come into play for investors. This also applies to credit vendors and banks who are considering lending money to a company. In these situations, you will need to gain an accurate understanding of how likely you are to be paid back so that you can charge interest accordingly.
3) For internal decision-making
As mentioned, financial reports are not the best tools for making all internal business decisions. However, they can serve as the ‘bedrock’ for other reports (such as management reports) that CAN and SHOULD be used to make decisions.
It’s crucial that financial reports are as accurate as possible – otherwise, any management reports (and ensuing decisions) based on them will be sitting on a shaky foundation. This is where companies can run into trouble, using legacy methods (such as one massive spreadsheet that multiple users have access to) rather than reaping the benefits of financial reporting by utilizing financial dashboards instead.
These online dashboards provide at-a-glance information on the financial health of your company, for both yourself and others.
Remember: the government (and outside investors) don’t care WHY your financial reports are inaccurate. They’ll just penalize you for being wrong – it’s that cut and dry.
4) For improved internal vision
Financial analysis and reporting are an accurate, cohesive, and widely accessible means of sharing critical financial information throughout your organization. If your financial insights or data is fragmented, things can quickly fall apart. In a nutshell, this alone answers the question, ‘what is financial reporting and analysis?’
Financial analysis and reporting help to answer a host of vital questions on all aspects of your company’s financial activities, giving both internal and external stakeholders an accurate, comprehensive snapshot of the metrics they need to make decisions and take informed action.
5) For raising capital and performing audits
Our final answer to the question ‘why is financial reporting important?’ is two-fold: for raising funds more accurately and managing your funds more compliantly.
Financial reporting and analysis assists organizations, regardless of industry, in raising capital both domestically and overseas in a well-managed, fluent way – an essential component to ongoing commercial success in today’s competitive digital world.
Also, financial analysis and reporting facilitate statutory audits. The statutory auditors are required to audit the financial statements of an organization to express their opinion. Reporting tools or software will give this official concise, accurate, and compliant information – which, of course, is vital.
4 Use-Cases For Financial Reporting
Up until now, we’ve looked at things from a big picture point of view. Now, let’s get a little more tangible and a trifle more down-to-earth by exploring some valuable questions that financial reports (and the reports based on them) can help you answer.
1. Is purchasing this stock a good idea?
If you’re really doing your due diligence on a company that you’re considering investing in as an individual or on behalf of your current organization, financial reporting analysis can give you some (relatively) “hard” data that will help you make your decision.
This is also one way you can gain insight into whether a company is potentially under- or overpriced in the stock market.
2. Are we profitable? Will we be in the future?
Without embracing the importance of financial statement, it’s difficult to tell how much money your company is making after paying all of your expenses and payroll. Since one of the main reasons a company exists is to make profits for itself and its shareholders, this is crucial information – no compromises.
3. How much cash ‘runway’ do we currently possess?
If you’ve ever been a part of the management team of a startup, you might have some idea of how stressful it can be not to know if you’re going to be able to ‘make payroll’ in the coming months.
That’s where the importance of ‘financial statement’ comes in.
Cash is oxygen to a business, and financial reporting analysis can help you see how many months’ payroll your business can give out while remaining financially solvent (assuming that revenue numbers stay the same).
This is a good ‘worst case scenario’ exercise to conduct regularly – and it’s even more sturdy if you assume that your revenues will fall over the next few months compared to your best guess projections.
4. Do we have the capital to invest in new lines of business?
Some companies, like Apple, like to sit on colossal amounts of cash. Their strategy is to have this money built up so that they can remain financially solvent even if some pretty catastrophic things happen to the economy.
However, other companies prefer to invest their money if they can do so while remaining financially healthy. For example, computer chipset manufacturers like Intel upgrade their factories and equipment on a regular basis.
These upgrades are extremely expensive, and while they are a good long-term investment, the company in question must make sure they have the short-term cash flow to support these kinds of moves.
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
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, assisting your strategic decision-making.
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.
To reiterate: why is financial reporting important? Like it or not, financial reporting will be around as long as businesses are making, and indeed, spending money.
Why? For the simple reason that governments will always collect taxes from businesses. As we said, taxes are one of the few certainties in life – and one of the primary reasons for financial reporting.
TASK within the broad framework of Financial Reporting, (i) Analyze any accounting issue/topic of your choice...
Write a ‘Term Paper’ within the broad framework of Financial Reporting The paper:- (i) should analyze any accounting issue/topic of your choice (ii) the issue/topic can be empirical or theoretical, related to general purpose financial reporting (iii) should be in not more than four (4) type written pages; 12-Times new roman font size You may wish to organize the paper in the following order:- Introduction 30% Theory and Practice (Discussions) 50% Conclusion or Recommendations 20%
Paper' within the broad framework of Financial Write a "Term Reporting The paper:- (ii) should analyze any accounting issue/topic of your choice the issue/topic can be empirical or theoretical, related to general purpose financial reporting should be in not more than four (4) type written pages; 12-Times new roman font size (iii) You may wish to organize the paper in the following order:- Introduction 30% Theory and Practice (Discussions) 50% Conclusion or Recommendations 20%
Paper' within the broad framework of Financial Write a "Term Reporting The paper:- (ii) should analyze any accounting issue/topic of your choice the issue/topic can be empirical or theoretical, related to general purpose financial reporting should be in not more than four (4) type written pages; 12-Times new roman font size (iii) You may wish to organize the paper in the following order:- Introduction 30% Theory and Practice (Discussions) 50% Conclusion or Recommendations 20%
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The following are all outcomes of a soundly developed conceptual framework for financial reporting except: a. increased confidence in financial reporting by financial statement users. b. enhanced comparability among companies' financial statements. c. faster resolution of new and emerging problems related to financial reporting. d. fewer incidents of fraud by employees of companies. Which of the following is not a result of the Sarbanes-Oxley Act? a. Code of ethics for senior officers of a publicly traded company b. Fewer restrictions...
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