What Is Financial Reporting?

Definition, Types and Importance

Updated June 25, 2022
Financial reporting is a crucial process for companies and investors, as it
provides key information that shows financial performance over time.
Government and private regulatory institutions also monitor financial reporting
to ensure fair trade, compensation and financial activities. Typically, you record
financial activities on several key statements, which others can use for review.
What is financial reporting?
Financial reporting is the process of documenting and communicating financial
activities and performance over specific time periods, typically on a quarterly or
yearly basis. Companies use financial reports to organize accounting data and
report on current financial status. Financial reports are also essential in the
projections of future profitability, industry position and growth, and many
financial reports are available for public review. There are several primary
statements to use when reporting financial data, and the information you
include in these documents fulfills several key objectives of financial reporting:
 Tracking cash flow
 Evaluating assets and liabilities
 Analyzing shareholder equity
 Measuring profitability
Importance of financial reporting
Financial reporting is a critical practice that's important because it:
Monitors income and expenses
Tracking income and expenses is another important process that financial
reporting supports. Monitoring financial documentation is necessary for
effective debt management and budget allocation and provides insight into key
areas of spending. Monitoring income and expenses ensures companies track
debts regularly to remain transparent in competitive markets. Therefore,
financial reporting gives you documentation methods to track current liabilities
and assets. Accurate financial documentation is also necessary to measure
important metrics, including debt-to-asset ratios, which investors use to
evaluate how effectively companies pay down debt and generate revenue.
Ensures compliance
Financial reporting encompasses specific processes that companies follow to
comply with mandatory accounting regulations. Each document you use to
evaluate financial activities comes under the review of several financial
regulatory institutions. This makes accurate documentation crucial to ensure all
financial reports comply with tax regulations and financial reporting criteria.
Accurate financial reporting also simplifies tax, valuation and auditing
processes, reducing the time to complete necessary financial obligations and
further validating financial compliance.
Communicates essential data
Key shareholders, executives, investors and professionals all rely on current
financial data to make decisions, plan budgets and monitor performance. The
importance of open communication and transparency is necessary to support
funding, investment opportunities and financial review. Many investors and
creditors rely on the information companies communicate in financial
documentation to assess profitability, risk and future returns.
Supports financial analysis and decision-making
Financial reporting is crucial for performing analysis to support business
decisions. Using financial statements improves accountability and supports the
analysis of critical financial data. Documents like the income statement and
balance sheet provide real-time information that you can use to track historical
performance, identify key areas of spending and create forecasts more
accurately. With better-developed data models and detailed financial analysis,
reporting helps businesses evaluate current activities and make decisions for
future growth.
Types of financial reports
Most companies document financial data on three key statements but
sometimes include the shareholder equity on a separate report. The following
documents make up the primary records of a company's financial activities:
Balance sheet
A balance sheet records the total assets, liabilities and equity you currently
possess. A quick review of the balance sheet can show you the total assets,
minus the equity and liabilities. Typically, businesses track balance sheets on a
quarterly basis and may include data from balance sheets when creating yearly
reports. Balance sheets also provide a real-time assessment of your current
asset liquidity and debt coverage. Commonly, balance sheets outline the
following line items:
 Liquid assets, including cash, certificates of deposit, short-term securities
and treasury bills
 Current assets, including accounts receivable, inventory, fixed assets and
prepaid expenses
 Current liabilities, including short-term and long-term debt, accounts
payable, payable wages and dividends, tax expenses and prepayments
from clients
 Shareholder and owner equity values, like retained income, receivable
dividends, capital gains and stocks
Income statement
While a balance sheet reviews current activities, the income sheet tracks these
processes over a longer period. Some businesses track income statements
quarterly and use these documents to monitor financial processes throughout
the year. The income statement shows performance for revenue, net income,
expenses and earnings per capital share if companies open shares on the stock
exchange. The income statement is the same document for reporting profits
and losses, and some businesses refer to the income statement as the profit-
and-loss statement, or P&L statement. There are several key elements on this
document:
 Operating revenue, which accounts for selling products or services
 Net and gross revenues, including total sales revenue and remaining
revenue after subtracting costs
 Nonoperating revenue from accrued interest, investment returns, royalty
payments, capital gains
 Primary expenses, including cost of goods sold (COGS), depreciation and
selling, general and administrative costs (SG&A)
 Secondary expenses, like debt or loan interest, asset loss and capital loss
Cash flow statement
The cash flow statement is important for measuring the efficiency with which
companies generate cash to pay down debts. Documentation of cash flow also
encompasses how well businesses fund operations and investments, showing
the ongoing activities that generate revenue to support expenses. Accurate
cash flow statements are important for understanding the efficiency of current
practices, spending activities and revenue generation.
The cash flow statement can also provide investors with valuable insight into
whether a business presents a higher investment risk. Unlike the balance sheet
and income statement that require some calculations to record financial values,
the cash flow statement typically comprises three key elements:
 Operational activities, including accounts receivable and payable,
inventories, wages, income tax and cash receipts
 Primary investment activities, including the generation and use of
investment earnings, asset sales, issued loans or credit and payments
from acquisitions or mergers
 Secondary investment activities, including fixed-asset purchases for
equipment, office space or property
 Financing activities, including stock repurchases, payable dividends, debt
repayments and issuance, cash from investors and cash payments
shareholders
Statement of shareholder equity
Shareholders' equity typically appears on the balance sheet, however, larger
corporations may document these activities on separate statements. The
statement of shareholder equity serves this purpose and includes the amounts
key stakeholders and owners invest in a company. These investments include
company stocks and securities, which pay out dividends at certain periods.
Additional items on a statement of shareholder equity that companies generally
review include:
 Common and preferred stock sales and repurchases
  Purchased treasury stock, minus any reissued treasuries during the
reporting period
 Retained earnings after subtracting dividends and losses
 Accumulated income, including incomes from unrealized capital gains,
minus capital losses
Who uses financial reports?
Financial reporting is an integral process across almost all industries.
Businesses and corporations depend on analysis and review of financial
documents to make decisions and gain financial backing. Financial institutions
also rely on financial documentation to monitor compliance, issue credit and
assess profitability and performance. Consider several groups and
professionals who use financial reports:
 Investors, shareholders and creditors: Investors and shareholders
have ownership of company stock and review financial reports to assess
how companies generate profit. Creditors also use data from financial
reports to understand how well companies pay off debts and invest
credit to generate business growth.
 Executive managers: Executive directors and teams use financial
reporting systems to review performance and revise documentation.
Financial reporting also supports executive decision-making, which
companies use to establish goals and departmental objectives.
 Regulatory institutions: Regulatory entities also gather and review
business data from financial reports. Government entities, including the
IRS and the and Securities Exchange Commission (SEC) monitor the
compliance of financial reporting activities for tax and revenue
documentation.
 Industry consumers: Financial reporting is also important to educate
consumers about company activities and create transparency in the
market. Open communication about earnings, investment activities and
charitable donations helps inform customers and can drive additional
sales.
 Unions and employees: Union organizations that represent employees
monitor financial reporting to ensure members receive fair wages and
treatment in the workplace. Financial statements are also beneficial to
employees who can review reports to gain insight into the financial
stability and long-term profitability of their companies.
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Financial Reporting
In any industry, whether manufacturing or service, we have multiple departments,
which function day in day out to achieve organizational goals. The functioning of
these departments may or may not be interdependent, but at the end of the day they
are linked together by one common thread – Accounting & Finance department.
The accounting & financial aspects of each and every department are recorded and
are reported to various stakeholders. There are two different types of reporting
– Financial reporting for various stakeholders & Management
Reporting for internal Management of an organization. Both this reporting are
important and are an integral part of Accounting & reporting system of an
organization. But considering the number of stakeholders involved and statutory &
other regulatory requirements, Financial Reporting is a very important and critical
task of an organization. It is a vital part of Corporate Governance. Let’s discuss
various aspects of Financial Reporting in the following paragraphs.

Definition of Financial Reporting

Financial Reporting involves the disclosure of financial information to the various
stakeholders about the financial performance and financial position of the
organization over a specified period of time. These stakeholders include –
investors, creditors, public, debt providers, governments & government agencies. In
case of listed companies the frequency of financial reporting is quarterly & annual.
Financial Reporting is usually considered an end product of Accounting. The typical
components of financial reporting are:
1. The financial statements – Balance Sheet, Profit & loss account, Cash
flow statement & Statement of changes in stock holder’s equity
2. The notes to financial statements
3. Quarterly & Annual reports (in case of listed companies)
4. Prospectus (In case of companies going for IPOs)
5. Management Discussion & Analysis (In case of public companies)
The Government and the Institute of Chartered Accounts of India (ICAI) have issued
various accounting standards & guidance notes which are applied for the purpose of
financial reporting. This ensures uniformity across various diversified industries when
they prepare & present their financial statements. Now let’s discuss about the
objectives & purposesof financial reporting.
Objectives of Financial Reporting
According to International Accounting Standard Board (IASB),
the objective of financial reporting is “to provide information about the financial
position, performance and changes in financial position of an enterprise that is useful
to a wide range of users in making economic decisions.”
The following points sum up the objectives & purposes of financial reporting –
1. Providing information to the management of an organization which is used for
the purpose of planning, analysis, benchmarking and decision making.
2. Providing information to investors, promoters, debt provider and creditors
which is used to enable them to male rational and prudent decisions regarding
investment, credit etc.
3. Providing information to shareholders & public at large in case of listed
companies about various aspects of an organization.
4. Providing information about the economic resources of an organization,
claims to those resources (liabilities & owner’s equity) and how these
resources and claims have undergone change over a period of time.
5. Providing information as to how an organization is procuring & using various
resources.
 6. Providing information to various stakeholders regarding performance
management of an organization as to how diligently & ethically they are
discharging their fiduciary duties & responsibilities.
7. Providing information to the statutory auditors which in turn facilitates audit.
8. Enhancing social welfare by looking into the interest of employees, trade
union & Government.
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 help 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 the backbone for financial planning, analysis,
benchmarking 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.

CONCEPT OP FINANCIAL REPORTING

Financial reporting may be defined as communication of published financial statements and
related information from a business enterprise to third parties (external users) including
shareholders, creditors, customers, governmental authorities and the public. It is the reporting
of accounting information of an entity (individual, firm, company, government enterprise) to
a user or group of users.1 Company financial reporting is a total communication system
involving the company as issuer (preparer); the investors and creditors as primary users, other
external users; the accounting profession as measurers and auditors; and the company law
regulatory or administrative authorities.
FINANCIAL REPORTING AND FINANCIAL STATEMENTS
The term ‘financial reporting’ is not restricted to information communicated through
financial statements. Although financial reporting and financial statements have essentially
the same objectives, some useful information is better provided by financial statements and
some is better provided, or can only be provided, by means of financial reporting other than
financial statements.
However, it is difficult, if not impossible, to have clear distinction between financial
reporting and financial statements. But it is now an accepted fact that financial reporting has a
broader scope than the financial statements which are only one of the many means of
conveying information about enterprise financial performance. FASB (USA)2 has described
some major characteristics of financial reporting and financial statements in its Concept No. 1
to highlight the distinction between the two:
1. Financial statements are a central feature of financial reporting. They are a principal
means of communicating accounting information to those outside an enterprise.
 Although financial statements may also contain information from sources other than
accounting records, accounting systems are generally organised on the basis of
elements of financial statements (assets, liabilities, revenues, expenses, etc.) and
provide the bulk of the information for financial statements. The financial statements
now most frequently provided are (a) balance sheet or statement of financial position,
(b) income or earnings statement, (c) statement of retained earnings, (d) statement of
other changes in owners’ or stockholders’ equity, and (e) statement of changes in
financial position (statement of sources and applications of funds)
2. Financial reporting includes not only financial statements but also other means of
communicating information that relates, directly or indirectly, to the information
provided by the accounting system, that is, information about an enterprise’s
resources, obligations, earnings, etc. Management may communicate information to
those outside an enterprise by means of financial reporting other than formal financial
statements either because the information is required to be disclosed by authoritative
pronouncement, regulatory rule, or custom, or because management considers it
useful to those outside the enterprise and discloses it voluntarily. Information
communicated by means of financial reporting other than financial statements may
take various forms and relate to various matters. News releases, management’s
forecasts or other descriptions of its plans or expectations, and descriptions of an
enterprise’s social or environmental impact are examples of reports giving financial
information other than financial statements or giving only nonfinancial information.
3. Financial statements are often audited by independent accountants (auditors) for the
purpose of enhancing confidence in their reliability. Some financial reporting by
management outside the financial statements is audited, or is reviewed but not
audited, by independent accountants or other experts, and some is provided by
management without audit or review by persons outside the enterprise