The purpose of financial reporting is to provide shareholders and other stakeholders with an understanding of the economic situation of a firm. This knowledge can be used to make decisions, such as whether or not to buy stock in the company, as well as much more complex decisions which are related to debt and equity securities. Financial reporting is typically required by law, with several exceptions. An annual report usually contains all of the information that a firm has determined will be important for outsiders to know about their economic situation.
According to corporate financial reporting consultants, this information may include past performance and forecasts for the future, both positive and negative, as well as explanations for any significant differences between forecasted results and actual results. At the same time, investors will look for information about key indicators such as profit (earnings) or cash flow. In this way, a company’s shareholders can make decisions regarding how to invest in the firm and to whom. If there is a significant difference between those forecasts and actual results, then this could be viewed negatively by some stakeholders or as positive by others.
The annual report is one of the documents most often required by Securities laws and regulations across the world. This document is available to those who are shareholders in a company and has been legally required to be made public since 1933 with the SEC regulations. As stated above, it is a summary of key financial information that has been determined to be necessary for outsiders to know about a firm’s performance or outlook during the past year as reported by management. Usually, this information is organized into a table called the “statement of income,” with several columns containing relevant figures.
The most important parts of the financial statements are the income statement, balance sheet and cash flow statement. The income statement summarizes revenues from sales and expenses during a specific period. The balance sheet shows a company’s total assets as of a particular date along with its liabilities (debt owed), stockholders equity (ownership equity) and total liabilities. Cash flow statement is like an operating statement for a business that shows change in cash throughout a period of time.
Statistics needed to calculate an income statement are usually provided in a separate schedule. This might include information about the company’s revenue from the sale of goods, the selling price of those goods, and any sales discounts taken during a specific period. Expenses consist of all money spent on producing and delivering the goods, as well as any costs related to operating the business. A profit or loss is calculated by comparing revenues with expenses.
The balance sheet is also divided into two parts: assets and liabilities/equity. Assets are on one side of the balance sheet, since they are owed by a company to third parties (liabilities). The other side of the balance sheet, known as “stockholders’ equity,” is made up of debt (liabilities) and ownership equity that has been invested by the company’s owners. Assets are separated into two categories: “current assets,” which may be converted to cash within a year, and “non-current assets,” which cannot be converted to cash within a year. Current liabilities are separated from long-term or non-current liabilities.
There are several ways in which these data can be presented, some of which will be discussed later. In most cases, the three statements will always have a header that shows when they were prepared along with several other required items. The information that is presented will vary somewhat depending on who prepared the annual report and when it was prepared.
The financial statements presented in the statement of income are divided into three main areas:
Revenues are income generated from sales of goods or services. The company’s gross margins, which refers to the difference between the selling price of all goods and services sold and the cost of providing those services, will usually be included here in order to see if there is a profit or loss generated. Expenses consist primarily of costs related to producing and delivering products, while also including costs associated with operating the business. A profit or a loss is calculated by comparing revenues with expenses.
The balance sheet is divided into two parts: assets (current assets and noncurrent assets) and liabilities/stockholders’ equity (liabilities and stockholders’ equity). Current assets consist of cash, accounts receivable, inventory, bills payable, and other current assets. Noncurrent assets include marketable securities, intangibles such as copyrights and patents that can be sold or used in the operation of the business over an extended period of time, goodwill (either acquired via acquisition or created through a business restructuring), prepaid expenses, property, plant and equipment that has depreciated over an extended period of time.
In this section is where the financial statements are presented in most cases. Only certain companies need to include the three main financial statements in this section. However, the balance sheet, income statement and cash flow statement are usually all included, but they are not always listed here.
Some companies do not include a “description of changes in financial position” in their annual report because they do not expect that there will be a change in any of the three financial statements. Here is where changes to the balance sheet or income statement would be noted if there is a change in financial position during the year and when it took place. In this section, certain items may be excluded depending on what is being presented or just for ease of reading.
A business may decide to provide an explanation or summary of certain notes that were included in the financial statements. These notes can be used to explain how certain transactions were treated in the financial statements and what kind of adjustments were made during the year.
The auditor’s report is important because it gives assurance to investors, creditors and others that the company follows the laws regarding accounting and disclosure. These regulations are meant to make sure that all relevant information has been disclosed and known to outsiders, so there will be less confusion about a company’s performance or outlook. The auditor’s report will also include assurance that the basis of the financial statements has been maintained. The auditors are responsible for following the instructions and regulations pertaining to assurance of these documents.
There are several different types of annual reports. A simple annual report provides basic financial statements and it might not have any explanations or notes included in the financial statements. A more detailed annual report might include more information, such as instructions to meet with a stockholder’s committee, fiscal year end dates, or other information relevant to investors. Some companies choose to provide a particular type of investor with a set of financial statements that are tailored especially for them. For example, a company that wants to attract institutional investors might choose to provide information in their annual report that is not found in other companies’ annual reports.
The balance sheet is a snapshot in time that shows the company’s assets (what it owns), its liabilities (what it owes), and its equity. It is a powerful tool for measuring how well a company is doing and for making financial decisions. It shows how much the company owns and owes, and can be used to predict future cash flow, expected performance, and other things.
