The term ‘Financial Reporting’ comprises the financial statement of the company as well as the sources by which the essential financial information is shared among the other users of the company. Here, you will know the objectives, users, limitations and types of financial reporting. The critical data is collected with the help of financial statements. It also helps make decisions regarding credit and investment and evaluate the projected cash flow. They give facts about the company’s resources, claims for those resources, and changes in the resources.
The financial statements, notes to financial statements and related disclosures, additional information like price changes and other means of financial reporting like management discussions and analysis and letters to stockholders all are included in the financial reporting.
Definition of Financial Reporting
According to Wild, Shaw, & Chiappetta, “Financial reporting is the communication of financial information useful for making an investment, credit, and other business decisions” Financial reporting emphasizes collecting information regarding the earning and related parts. The current and ongoing capability of the company can be evaluated better by using the data collected from accrual accounting instead of data from receipts and payments.
Objectives of Financial Reporting
The main objectives of financial reporting are as follows:
1) The data given by the financial reporting is required by the prospective investors and creditors, and other users in taking decisions regarding investment, credit, etc.
2) The data given by the financial reporting must enable the company’s investors, creditors and other users to calculate the amount, timing and uncertainty of future net cash inflows.
3) The data presented by the financial reporting must give the data related to the company’s economic resources, the liability of the company to hand over their resources to other companies and the conditions and actions causing changes in the resources and their claims
4) By evaluating the company’s income within a time, the financial reporting provides data regarding the company’s financial position.
5) It represents the elements influencing the liquidity and solvency of the company regarding the collection and expenditure of cash, borrowings and its repayments and capital transactions by giving the data such as cash dividends and delivery of resources of the company to the owners:
6) The data represented by financial reporting should explain how the company transfers the responsibilities to its stakeholders for the use of assigned resources.
7) The data collected from the financial reporting should benefit the managers and directors in taking decisions in the owner’s interest.
8) It also aims at decreasing the company’s capital cost.
9) It also emphasizes acquiring economic capital
Types of Financial Reporting
Following are the types of financial reporting
1) Internal Financial Reporting
Internal financial reporting means a financial report the management uses for a particular purpose. The manager requires consistent financial data to manage the operation adequately and accurately.
2) Special-Purpose External Financial Reporting
The special-purpose external financial reports are the financial information required to fulfil the particular needs of users not part of the organization. The external party that enforces the requirement decides such reports’ contents, formats and timing.
3) General-Purpose External Reporting
General-purpose external reporting has the following three groups of users:
i) The company is firstly accountable to the shareholders, customers and consumers.
ii) The users directly denote the consumers.
iii) The users who are into the lending process and in giving loans to the company.
Users of Financial Reports
The following are the primary users of the financial reports:
1) Resource providers like employees, lenders, creditors, suppliers, investors and contributors.
2) A recipient of goods and services includes the customers and beneficiaries.
3) Parties performing review or oversight function comprises parliaments, governments, regulatory agencies, analysts, labour unions, employer groups and media.
Limitations of Financial Reporting
The following are the limitations of the financial reporting:
1) The things that require reporting may act as a burden to the smaller organization.
2) Financial reporting does not include transactions that do not involve market transactions or the exchange of property rights. It focuses more on economic performance rather than social performance.
3) It shows the classification of the prevailing practices.