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Financial Reporting Objectives

Updated on January 2, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

The main objective of the financial reporting for any company is to present the necessary information concerning the financial position of the company, the cash flow position of the company, and the various obligations of the company that is relevant for its users for tracking business performance, the understanding financial health of the company as well as for informative decision making.

Objectives of the Financial Reporting

The following financial reporting objective provides an outline of the most common type of goals of the financial reporting that are present. It is impossible to provide all the examples of objectives that address every variation of every situation, as there are multiple such objectives.

Below are the top 4 objectives of financial reporting –

  1. Provide Information to the Investors and the Potential Investors
  2. Track the Cash Flow in the Business
  3. Information About the Accounting PoliciesAccounting PoliciesAccounting policies refer to the framework or procedure followed by the management for bookkeeping and preparation of the financial statements. It involves accounting methods and practices determined at the corporate level.read more Used
  4. Enable the Analysis of the Assets, the Liabilities, and the Owner’s Equity

Let us discuss each of these in detail –

Financial Reporting-Objectives

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Top 4 Objectives of Financial Reporting

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Financial Reporting in Video

#1 – Provide Information to the Investors and the Potential Investors

Investors of the company who have invested their funds in any business want to know how much return they are getting from their investment, how efficiently their capital investmentCapital InvestmentCapital Investment refers to any investments made into the business with the objective of enhancing the operations. It could be long term acquisition by the business such as real estates, machinery, industries, etc.read more is being used, and how the company is reinvesting the cash.

Also, the potential investors want to know how the company has performed in the past, where they are planning to invest their funds and whether it is worth investing in.

Financial reporting by the companyFinancial Reporting By The CompanyFinancial reporting is a systematic process of recording and representing a company’s financial data. The reports reflect a firm’s financial health and performance in a given period. Management, investors, shareholders, financiers, government, and regulatory agencies rely on financial reports for decision-making.read more helps the investors and potential investors in deciding whether the business is worth for their cash or not.

Example

Statement of the Profit and Loss shows the net profit earned by the company and the profit available for the shareholders to get distributed as the dividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more in the current year and details of the previous years.

If the company is earning the right amount of profits and the profit is also increasing from the previous year, then this shows that the company is efficiently working and growing. The investor’s money is appropriately utilized, whereas if the company is incurring losses, it shows that its money is at risk. The company is not able to use it properly.

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#2 – Track the Cash Flow in the Business

With the help of financial reporting, different company stakeholders can know 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, and whether the company can cover their debts, etc.

It shows the details about the cash transactions by adjusting the non-cash transactionsNon-cash TransactionsNon-cash expenses are those expenses recorded in the firm's income statement for the period under consideration; such costs are not paid or dealt with in cash by the firm. It involves expenses such as depreciation.read more, thereby determining whether cash in the business is enough all the time or not.

Example

Company A has a significant value in non-cash transactions. It sometimes has the billions of dollars it owes to the company, but it hasn’t been received.

In that case, the profit and loss statement is not always sufficient. At that time, statement of cash flowsStatement Of Cash FlowsA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read more played a vital role as it provided the details of cash transactions and the company’s cash flow position to the creditors, banks, and other stakeholders.

#3 – Information About the Accounting Policies Used

There are different accountingTypes Of AccountingThere are different types of the accounting which an organization can follow as per the scope of its work and need of stakeholders. Some of them include financial accounting, forensic accounting, accounting information system, managerial accounting, taxation, auditing, cost accounting, etc.read more policies, and various companies can use different policies according to their particular requirements and applicability. Therefore, 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. For example, 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.

Example

There are two companies in the same industry, company A and company B. Company A uses the FIFO inventory methodFIFO Inventory MethodUnder the FIFO method of accounting inventory valuation, the goods that are purchased first are the first to be removed from the inventory account. As a result, leftover inventory at books is valued at the most recent price paid for the most recent stock of inventory. As a result, the inventory asset on the balance sheet is recorded at the most recent cost.read more. In contrast, Company B uses the LIFO inventory methodLIFO Inventory MethodLIFO (Last In First Out) is one accounting method for inventory valuation on the balance sheet. LIFO accounting means inventory acquired at last would be used up or sold first.read more to value its inventory.

Now let’s suppose all the other things are equal. The financial statements of company B would most likely show less amount of income because it will have a higher value of the cost of the goods sold. On the other hand, Company A would have lower income and higher inventory.

So, these two companies’ financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more cannot be compared as they both use different accounting methods. However, one would know about the accounting policies used from the financial reporting disclosures. Thus providing information about the accounting policies used is one of the critical objectives of financial reporting.

#4 – 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 what it can expect in the future and what should be changed now for the future. It also shows the availability of resources by the company for future growth.

Example

There is a company A ltd., manufacturing the bottles in the market. It got an order to manufacture and deliver a massive quantity of bottles in the next year. Now, the company’s management wants to know whether it has sufficient assets for the manufacturing of the products so that it can meet the existing demand of the bottles in the market and fulfill the new bulk order on time.

So, with the help of the financial reporting, the company’s management can get to know the capacity of the existing assets and whether the company requires any additional resources for fulfilling the new order received by it.

Summary of Financial Reporting Objectives

The objective of financial reporting is to track, analyze, and report the concerned business’s income. The purpose of the financial reports is to properly examine whether the resources are appropriately used or not in the business, the company’s cash flow the details of cash flows from each business activity, how are the performance and the financial health of the business. This reporting helps the company’s investors make informed decisions about the business in which they invested or thinking of investing in operating.

Recommended Articles

This has been a guide to Financial Reporting Objectives. Here we discuss the top 4 objectives of Financial Reporting and practical examples and explanations. You can learn more about accounting from the following articles –

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Comments

  1. Ronaldo Caro says

    Good

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