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Importance of Financial Reporting
The importance of financial reporting cannot be exaggerated. It is considered 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,
Statutory – Financial Reporting is required by the law for performing statutory audits on the company’s financial statements and reports. These statements help the auditors to express their opinions on the fairness of the financial statements.
Internal Decisions – Financial Reporting is considered the best tool for formulating the internal decision of an organization by providing accurate and updated information on financial statements.
For example, Lenovo Inc’s 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.
External Users – 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 profit every year and has a strong brand name, credibility and customer base across the world. Due to these reasons, the company has the capacity to procure funds from the banks and NBFCs. This helps the company to grow, prosper and generate huge loans.
Vital Information – 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.
Planning and Analysis – Financial Reporting acts as a backbone to financial planning, decision and policymaking, financial analysis and is responsible for maintaining company standards.
Investment Decisions – Financial Reporting helps companies and organizations 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 dividends 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.
Employees and Workers – 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 bonuses and incentives over and above its basic pay to all its prospective employees. This motivates the employees to work even harder and deliver better services to their clients
Financial Information – 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.
We can conclude that financial reporting plays an important role in not only helping the organization to derive long-term profits but also creating an opportunity to expand and diversify the business by setting up long-term goals and better business strategies.