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  1. This answer was edited.

    To begin with, financial reporting is mainly of two types: External and Internal. Reports are prepared for stakeholders (external) as well as the managers (internal) of the organization. The different components of financial reporting are as follows: 1. The financial statements of a company- the incRead more

    To begin with, financial reporting is mainly of two types: External and Internal. Reports are prepared for stakeholders (external) as well as the managers (internal) of the organization.
    The different components of financial reporting are as follows:

    1. The financial statements of a company- the income statement, balance sheet, cash flow statements, and the statement of shareholders equity.

    2. The notes to financial statements

    3. The quarterly and annual reports of a company

    4. Prospectus

    5. Management discussion & analysis

    1. The financial statements

    Income statement – The income statement of a company shows the revenues, expenses, net income, and earnings per share. It is the most important financial statement because it depicts the overall performance of a company.

    Statement of financial position – It comprises of a companies assets, liabilities, and equity.

    Cash flow statement – A cash flow statement shows the monetary position of a company with the help of cash inflows and outflows during a particular financial period.

    Statement of equity – This financial statement shows the changes in owners’ equity over a financial period.

    2. The notes to financial statement

    While recording and classifying the above mentioned financial statements in the books of accounts, the accountants have to maintain various notes to separately show the working. These notes comprise of adjustments such as depreciation, interest, dividends, prepaid expenses, accrued income, etc.

    3. The quarterly and annual reports of a company

    These types of reports are usually prepared in the case of listed companies. These reports comprise of the financial statements and their notes to accounts.

    4. Prospectus

    In terms of finance, a prospectus is a document that portrays the financial security for potential buyers. It is usually recorded in the financial reports of those companies that are going for IPOs.

    5. Management discussion and analysis

    The preparation of a financial report involves the approval at all managerial levels and close analysis to avoid any kind of mistakes. However, this usually takes place in the case of public companies.  

    Hope this helps.

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  1. This answer was edited.

    Importance of Financial Reporting The importance of financial reporting cannot be exaggerated. It is considered as a primary requirement of all the stakeholders for many reasons and purposes. Financial reporting discloses the position, liquidity and performance of the company. The following key poinRead more

    Importance of Financial Reporting

    The importance of financial reporting cannot be exaggerated. It is considered as a primary requirement of all the stakeholders for many reasons and purposes. Financial reporting discloses the position, liquidity and performance of the company. The following key points highlight why is financial reporting framework important-

    1. Financial Reporting is required by the law for performing statutory audits on the company financial statements and reports. These statements help the auditors to express their opinions on the fairness of the financial statements.

    2. Financial Reporting is considered as the best tool for formulating the internal decision of an organization by providing accurate and updated information on financial statements.

    For example- Lenovo Inc profit and loss account registered a sharp decrease in net profit due to the use of obsolete technology and poor battery life. Hence the company management should focus on improving overall performance and formulating new strategies to regain customer trust and improve business performance.

    3. Financial Reporting discloses financial statements that give an idea to the external users (say- creditors, third parties, banks and investors) on the financial creditworthiness, soundness, integrity and liquidity position of the company.

    For Example- Apple Inc registers a sharp increase in the profit every year and has a strong brand name, credibility and customer base across the world. Due to these reasons, the company has capacity procure funds from the banks and NBFCs. This helps the company to grow, prosper and generate huge loans.

    4. Financial Reporting software provides vital information which can be used by the company for making quick and informed business decisions. Such as opening a new business branch across the country.

    5. Financial Reporting acts as a backbone to financial planning, decision and policymaking, financial analysis and is responsible for maintaining company standards.

    6. Financial Reporting helps companies and organization to raise share capital by attracting domestic and foreign investments through marketing, promotions and providing high returns on investments in the form of share dividends.

    For Example- HSBC Bank pays off a higher percentage of dividend to its shareholder than compared to other banks. This helps to bank to attract new domestic and foreign investments thereby issuing shares to new shareholders. Financial reporting helps the bank in attracting shareholders by publishing financial statements in newspapers, magazines and prospectus.

    7. Financial Reporting helps the employees and workers to understand and analyze the position and performance of the ownership as well as management of a company or an organization based on the audited financial statements.

    For Example- Amazon has recorded a sharp spike in profits after deducting corporate taxes and other duties. The company management has decided to pay bonus and incentives over and above its basic pay to all its prospects employees. This motivates the employees to work even harder and deliver better services to its clients

    8. Financial Reporting furnishes financial information which helps the organization in bidding and negotiating a better business contract. It helps the government in framing suitable economic plans and policies by assessing financial statements and business performance.

    Conclusion

    We can conclude that financial reporting plays an important role in not only helping the organization to derive long-term profits but also creates an opportunity to expand and diversify the business by setting up long-term goals and better business strategies.

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