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.
The Objectives & Purposes of financial reporting:
- 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.
- Providing information to the management of an organization which is used for the purpose of planning, analysis, benchmarking and decision making.
- Providing information to shareholders & public at large in case of listed companies about various aspects of an organization.
- Providing information as to how an organization is procuring & using various resources.
- 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.
- Providing information to various stakeholders regarding performance management of an organization as to how diligently & ethically they are discharging their fiduciary duties & responsibilities.
- Enhancing social welfare by looking into the interest of employees, trade union & Government.
- Providing information to the statutory auditors which in turn facilitates audit.
Primary objectives of financial reporting:
(a) Investment Decision-making.
(b) Management Accountability.
(a) Investment Decision-Making:
The basic objective of financial reporting is to provide information useful to investors, creditors and other users in making sound investment decisions. These decisions concern the efficient allocation of investment funds and the selection among investment opportunities.
(b) Management Accountability:
A second basic objective of financial reporting is to provide information on management accountability to judge management’s effectiveness in utilizing the resources and running the enterprise.
Management of an enterprise is periodically accountable to the owners not only for the custody and sale-keeping of enterprise resources, but also for their efficient and profitable use and for protecting them to the extent possible from unfavorable economic impacts of factors in the economy such as technological changes, inflation or deflations.
Enable the Analysis of the Assets, the Liabilities, and the Owner’s Equity
By monitoring the assets, the liabilities and the owner’s equity, and any changes in them using the financial reporting by the company, one can know that what it can expect in the future and should be changed now for the future. It also shows the availability of resources by the company for future growth.
Track the Cash Flow in the Business
With the help of financial reporting, different stakeholders of the company can know that from where the cash in the business is coming, where the money is going, whether there is sufficient liquidity in the business or not to meet its obligations, whether the company can cover their debts, etc.
It shows the details about the cash transactions by adjusting the non-cash transactions, thereby determining whether cash in the business is enough all the time or not.
Information About the Accounting Policies Used
There are different types of accounting policies, and various companies can use different policies as per their particular requirements and applicability. Financial reporting provides information about the accounting policies used by the company. This information helps the investors and the other stakeholders in knowing about the policies used in the company for the different aspects.
It also helps to know whether the proper comparison between the two companies is possible or not. Two companies within the same industry can also use two different policies, so the person making the comparison should consider this fact in mind at the time of making the comparison.
Provide Information to the Investors and the Potential Investors
Investors of the company who have invested their funds in any business want to know that how much return they are getting from their investment, how efficiently their capital investment is being used, and how the company is reinvesting the cash.
Also, the potential investors want to know how the company is performing in the past where they are planning to invest their funds and whether it is worth investing.
Financial reporting by the company helps the investors and the potential investors in deciding whether the business is worth for their cash or not.