Financial reporting is the process of compiling and analyzing a company’s financial data to monitor its performance over time. The three most-used financial reports identified by Fintalent’s financial reporting consultants are:
1) Balance Sheet
2) Income Statement, and
3) Statement of Cash Flows.
These documents provide a detailed accounting of the company’s cash flow, such as money in and out through different sources. This process is overseen by a CPA (Certified Public Accountant) or auditor, who has extensive knowledge in this area. Financial reporting can also mean providing information about the company’s performance to potential investors so that they can make better-informed decisions on whether or not they want to invest in the company.
The purpose of financial reporting is to give a company, its investors and those who use the company’s accounting information about its operations and condition, a complete picture of the financial health of the business. Financial reporting also provides an independent assessment to a third party that may be used as supporting evidence in regulatory matters or legal disputes.
Financial reporting is also used to spot trends and patterns. Some key aspects in analyzing financial statements include: overall performance, trends in sales or expenditures over time, comparisons with other companies operating in the same business sector, analysis of assets and liabilities, inventory management techniques and relations with suppliers.
Financial reporting is also used to identify risks to the company and its shareholders. This is vital for the proper functioning of the company, as well for a company’s ability to remain solvent during economic downturns.
There are several different brands of hardware and software used by accountants in their toolkits, such as Financial Accounting Standard (FAS) and Financial Accounting Standards Board (FASB). FAS is abbreviated from “Financial Accounting Standards” while FASB stands for “Financial Accounting Standards Board”. These two terms came into standard usage around the mid-1980s.
FASB is a non-profit association started in 1983 to establish accounting standards for the United States and Canada. FASB’s purpose is to set accounting standards that are more consistent and that are generally accepted in the financial reporting industry. The group of individuals who make up FASB are made up of financial experts, accountants, business people, and others working in business finance.
The following definitions provide some important points as to how financial reporting works:
“Financial Statements (or ‘Statements’) provide a picture of the entity based on its assets, liabilities, equity and income over a period of time. The most commonly known statements are the balance sheet, income statement and cash flow statement.” “Financial statements can be represented in a variety of ways:
“Generally Accepted Accounting Principles (GAAP) are the guidelines required by the SEC for companies to follow in order to ensure consistency in financial reporting.”
“The objective of these standards is to help decision-makers compare one company’s financial information with another company’s and to determine which companies may be more profitable or financially stronger. GAAP also imposes certain accounting requirements that affect how income and expenses are reported as well as how assets, liabilities, equity and cash flows are recorded. For example, a company must always report both gains and losses on its assets or on its investments under GAAP. These rules exist to give investors a consistent method of measuring economic performance over time. If companies could choose which recording methods to use, then comparing one company’s performance with another might be difficult.”
The Financial Accounting Standards Board (FASB) was created in 1973 to set uniform accounting standards that are “generally accepted” in the United States and Canada. FASB is the tool used by accountants that outlines how certain transactions should be recorded and reported. FAS 139 is an example of behind-the-scenes work done by FASB. In June 2006, the FASB issued FAS 139 “Accounting for Transfers of Financial Assets”, which improves financial reporting on transfers of financial assets.
The “GAAP” is a set of rules in the United States used by national accounting firms and auditors to account for their clients.
Accounting principles are widely used by companies and banks throughout the world. A fundamental principle of accounting is that financial reports must be complete, accurate and unbiased for a reasonable period of time. This is known as the “consistency principle”. No matter if the company is only a one-person business, or a multi-million dollar corporation, all financial records must be transparent and unbiased. After all, it is not good to have incomplete information on how a company (or bank) is doing. The consistency principle ensures that a company’s financial reports are giving true, complete and unbiased accounts for the construction of an investor’s or banker’s future decisions on whether to invest in that particular entity.
The following four elements of financial reporting are used to evaluate a company’s performance:
- the level of assets and liabilities;
- The level of income and expenses;
- The level of equity and cash flows; and
- Trends in results.
To find out about a company’s performance, it is important to analyze its balance sheet, income statements, cash flow statements and other reports. Some key points to take into consideration when analyzing these key aspects are:
Residual income is essentially the amount remaining in an organization after all operating expenses have been covered. The residual income is an inherent part of the cost of doing business. The residual income ratio indicates how much additional profit the company expects to generate after covering all its operating expenses.
This ratio is used to compare the profitability of companies within different industries and/or in different periods of time. It also helps investors evaluate whether a particular income statement reflects favorably on a company’s possible performance for the upcoming year or not. An increase in the residual income ratio typically indicates that a company is performing better, as it has more than enough revenue to cover its expenses and profits. On the other hand, when a company’s residual income ratio falls, it typically means that there are insufficient funds to cover operational costs with any surplus left in their profit margins.
The total stockholders’ equity per share is a preview of the company’s value. The value of a company depends on its ability to finance future operations, sell assets or issue stock, or go public. This metric is used to determine whether the organization will be able to withstand any unforeseen events in the future. It is also used by investors and analysts to determine whether or not they should invest in a particular company. A high ratio indicates that the company has plenty of funds available for investments and future growth, while a low ratio would mean that there are limited funds available for such activities.
The Cash Flow statement represents the actual flow of money in and out of a company’s operations. In other words, it is a statement of the changes in cash in and out during the time period that has been stated on the income statement. It is also used to judge whether or not a company will be able to meet its obligations for working capital. A high ratio would indicate that the organization has sufficient funds to meet working capital needs and pay its bills at the time of due dates, while a low ratio would mean that there are no funds at all.
The Balance Sheet is an entirely different way of expressing how well a company is doing financially. This statement represents the summary of all sources and uses of funds, including both current and fixed assets. In addition, it includes liabilities and equity, as well as the capital structure. The Balance Sheet is composed of five main elements:
To facilitate analysis, most organizations use multiple years’ worth of financial data for comparison purposes. This is known as a trend analysis; an upward trend would indicate that an organization is doing better on all accounts (income statements, cash flow statements, etc.) than in previous years; a downward trend would indicate the opposite.
A company’s financial information can include more than just income statements, balance sheets and cash flow statements.