Required By Law
First off, financial reports are required by law for running a business and allowing the government to check whether you are paying your fair share of taxes according to the state and federal laws. At the same time, knowing how to create accurate finance reports can help to reduce your tax burden while staying in compliance.
It Helps Improve Performance
Another reason why a reliable financial reporting system is important is that it helps a business make better decisions. After analyzing the financial statements of a period, managers can determine if the current situation allows for more flexibility or whether restraint is required.
Provides Stakeholders with Key Data
Financial reporting refers to the process of sharing information with stakeholders, so it’s not surprising it’s one of the main reasons why they are important. Investors and creditors need to understand the financial situation of a business when deciding what to do with their stake in a company or whether to lend it money.
Financial reports provide vital information to stakeholders and tax offices about the financial performance of a business.
But what is their exact purpose? And what information do they include?
Well, for one thing, they provide an overview of the financial operations that occurred in a company and provides insights about the decisions that were made by executives.
Most companies’ financial reporting also includes information about the financial positions that the company is holding, as well as cash flows over specific periods.
The reason why it’s such a convenient practice is that financial reporting follows standard accounting practices by offering all of the information necessary to gain an overall understanding of an entity’s financial situation.
It shows a company’s main financial data, including its revenue, profit, expenses, as well as cash flow and the total capital that it possesses.
Using that data, lenders can decide whether to extend credit, investors can gauge whether they should invest, tax offices can determine how much a business has to pay, and unions can figure out how capable a company is of meeting their demands.
We’ve learned why financial reporting is important and what its purpose is, so now let’s explore some of the information that the reports should contain.
Since financial reporting refers to the process of providing more information to interested parties about the state of the business, it’s only natural to expect that the report should contain not only specific figures but also a wide range of statements so that a full-range evaluation can be made.
The financial report must contain the primary financial statements from that period, including the income statement, balance sheet, cash flows statement, and stockholders equity statement.
What’s more, the reporting must also offer notes regarding the financial statements and the financial operations of the company, as these notes play an integral role in providing more context about a company’s decisions and positions.
Another type of report that must be included is one specifically meant for stakeholders, providing them with an informative overview of the company’s situation and giving them insights about the status of their investment.
Finally, it must also contain reports that are required for government agencies such as the Securities and Exchange Commission (SEC). And, as already mentioned before, the report serves as a way for tax offices to check whether the company has paid its fair share to the government.
Putting together a financial report for stakeholders and government agencies is a challenging task that usually requires help from professionals with more experience in the field.
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