Which is an objective of financial reporting

Financial reports adhere to a group of taxation, accounting and legal requirements, called the International Financial Reporting Standards (IFRS). This is so a business’s finances can be understood all over the world – a necessity with the increase of global companies and international shareholders. The US is currently an exception to this as companies there are required to use the Generally Accepted Accounting Principles (GAAP).

We often hear about financial reporting standards such as US GAAP and IFRS and that companies need to abide by these standards while preparing their financial reports. One may ask why we need these financial reporting standards. Each business is unique with its own business needs, financial requirements, and style of operations.  Then what’s the purpose of these financial reporting standards? The uniqueness of businesses is the exact reason why we need these reporting standards.

The International Accounting Standards Board (IASB), the international accounting standard-setting body, expresses the following:

The objective of financial statements is to provide information about the financial position, performance, and changes in financial position of an entity; this information should be useful to a wide range of users for the purpose of making economic decisions.

The financial statements prepared by a company are used by a variety of people such as investors, creditors, employees, and customers, among other people. For these financial statements to become useful for such wide variety of consumers, the reports must be consistent and comparable. This is what these financial reporting standards help us achieve – consistency and comparability. Businesses are complex, and the financial transactions can get even more complex. Unless there is a set of guiding principles that help us in bringing order to how we record our transactions, the financial statements will remain meaningless, and will lead to a plethora of accounting scandals.

Let’s take a simple example to understand this. Assume that two companies buy similar machinery at the same time. These machines will serve the companies for several years. The financial reporting standards require that at the time of purchase the cost of the machinery should be recorded as an asset and then this cost should be apportioned as depreciation over the estimated life of the machinery. Because it’s a part of the standards each company will be required to record the machinery in this way. If there were no financial reporting standards, each company will record the transaction in their own way. One company may choose to record it as an asset while the other may record it as an expense. Things can just get more difficult with the complexity of transaction, for example, the concept of cash vs. accrual accounting. If the reporting standards did not provide guidelines for recognition of revenue and expenses, different business would have reported their revenues and profits that would be totally incomparable.

These financial reporting standards, while bringing consistency and comparability to the financial statements, also allow some level of flexibility to account for the different economic realities of different businesses. In our example of machinery, the standards allow the companies to have some flexibility over choosing the useful life of the asset depending on how they use it.

We will focus on two key accounting standard-setting bodies, namely, International Accounting Standards Board (IASB), and Financial Accounting Standards Board (FASB), that have developed similar financial reporting standards called International Financial Reporting Standards (IFRS), and the Generally Accepted Accounting Standards (U.S. GAAP).

It is imperative for us to understand these financial reporting standards and the differences between them to be able to able to evaluate the reported financial information with more clarity and be able to better analyze the financials of companies.

Every company has multiple departments having different functions for handling and achieving organisational goals. All the departments have their specific need; for that, we have the Accounting and Finance Department. A Company needs a timely and accurate financial reporting process to bring investors and new customers and to create a platform for expansion and future growth.

What is Financial Reporting?

Financial Reporting is a standard accounting method to disclose a company’s financial information to various stakeholders about the financial position and financial performance over a particular period. These stakeholders include investors, creditors, government bodies, etc. Financial reporting is crucial for a better understandingof the sources of funds, how funds are utilised, and information related to the potential investments.

Types of Financial Reporting

There are two kinds of Financial reporting which help companies manage their day-to-day finances are:

1. Financial Reporting for Various Stakeholders[1]
2. Management reporting for Internal Management

The following are the Key objectives of Financial Reporting:

Accurate and Timely Information

Financial Reporting provides information to investors and creditors about the investment model of the business and how efficiently and rationally the funds are invested. The genuine information answers many doubts about lending options to a borrower, providing a loan to a customer, and investing in a business. Financial Reporting helps decide the prospects and profit generation potential of a company.

Cash Flows Statements

The Statement of Cash Flows statements shows the inflows and outflows of cash. In particular, it provides relevant information related to the company’s activities, presenting the company’s performance and accessing the possibilities for continuous growth.

Income Statements

The statement shows the expense and revenues of a company for a financial year. One of the objectives is to show the net profits and losses resulting from business operations and activities over a particular period, which acts as the key objective of the financial reporting.

Accounting Standards

There are different accounting standards, and companies can use different standards per their specific needs and requirements. Therefore, financial reporting provides information about the followed accounting practices and standards of the company. This information helps the potential investors and the other stakeholders about the quality of standards and policies the company follows for different purposes.

Transparency

A transparent system is a crucial objective of financial reporting help present a lucid picture of a company’s finances before investors and stakeholders without any miscommunications. Transparent and full access to the company’s financial information helps build trust and generate goodwill among the businesses. It tends to solidify the relationship between different stakeholders of the company. This can help project the growth and access the real potential of the company’s current performance.

Transparency is essential for every company’s stakeholders, whether outside or inside. This further helps finance teams set the tone by actively communicating their ideas and plans with their key investors and stakeholders.

Trial balance

The debit and credit balance computation is done to equalise the total funds. The figures of a trial balance of an organisation can help prepare the final balance sheet of the financial year and can present the financial position of any particular time of the year.

Manual and Automated Systems

There are many mistakes as filing is based on the traditional systems, which are handled manually and is considered a risky system for businesses because it can lead to inaccurate reporting. On the other hand, financial transactions are automatically stored in the database via a software-based system without any errors. Nowadays, most businesses have shifted towards software-based or automated systems, and data can be stored in large volumes. Most companies are availing these systems for increasing the standard and to achieve the key objective of financial reporting.  

Public Interest as a key objective of Financial Reporting

Financial statements don’t have a limited role; they serve the public to make an informed decision about their investments and access the company’s impact over the long run on the nation’s development.

Importance of Financial Reporting

The importance of financial reporting is significant and can’t be underestimated. The financial reports are needed for multiple purposes and reasons by almost everyone, whether they are associated with the company or not. Some of the following points are highlighted below:

• Financial Reporting help companies to comply with various regulatory and statutory requirements. The organisations are mandated to file financial statements before the Registrar of Companiesand different government agencies. In the case of listed companies, quarterly and annual reporting must be filed to stock exchanges and published for the public to inform the potential buyers of the shares to have detailed knowledge about the company.
• Financial Reporting facilitates the statutory audit. The company appoints Statutory auditors to audit the different financial statements of a company and express their opinion on the working of the company.
• Financial Reports are often considered the backbone of strategic financial planning, analysis, standardisation and decision-making.
• Financial reporting helps companies raise funds both in domestic and overseas markets.
• For participation in the bidding process, procurement of government supplies etc., companies are required to furnish their financial statements.

Conclusion

Whether you are an owner or investor of a company, the standard analysis of financial reports is a must and vital for the key objective of financial reporting. From the above discussion, it is clear that financial reporting contains reliable and accurate financial information that various shareholders use for different purposes. Financial Reporting helps clients and potential investors make informed decisions about the business they have already invested in or are planning to invest.A robust financial reporting system promotes good competition and facilitates capital inflows, thus boosting economic development.

Which is an objective of financial reporting quizlet?

What are the two 2 main objectives of financial reporting?

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