What are the Key Objectives of Financial Reporting of a Company?

Raghvendra Sonker

13 Sep, 2022

Every company has multiple departments having different functions for handling and achieving organisational goals. All the departments have their specific need; for that, we have the Accounting and Finance Department. A Company needs a timely and accurate financial reporting process to bring investors and new customers and to create a platform for expansion and future growth.

What is Financial Reporting?

Financial Reporting is a standard accounting method to disclose a company’s financial information to various stakeholders about the financial position and financial performance over a particular period. These stakeholders include investors, creditors, government bodies, etc. Financial reporting is crucial for a better understandingof the sources of funds, how funds are utilised, and information related to the potential investments.

Types of Financial Reporting

There are two kinds of Financial reporting which help companies manage their day-to-day finances are:

1. Financial Reporting for Various Stakeholders^[1]
2. Management reporting for Internal Management

Key Objectives of Financial Reporting 

The following are the Key objectives of Financial Reporting:

Accurate and Timely Information

Financial Reporting provides information to investors and creditors about the investment model of the business and how efficiently and rationally the funds are invested. The genuine information answers many doubts about lending options to a borrower, providing a loan to a customer, and investing in a business. Financial Reporting helps decide the prospects and profit generation potential of a company.

Cash Flows Statements

The Statement of Cash Flows statements shows the inflows and outflows of cash. In particular, it provides relevant information related to the company’s activities, presenting the company’s performance and accessing the possibilities for continuous growth.

Income Statements

The statement shows the expense and revenues of a company for a financial year. One of the objectives is to show the net profits and losses resulting from business operations and activities over a particular period, which acts as the key objective of the financial reporting.

Accounting Standards

There are different accounting standards, and companies can use different standards per their specific needs and requirements. Therefore, financial reporting provides information about the followed accounting practices and standards of the company. This information helps the potential investors and the other stakeholders about the quality of standards and policies the company follows for different purposes.

Transparency

A transparent system is a crucial objective of financial reporting help present a lucid picture of a company’s finances before investors and stakeholders without any miscommunications. Transparent and full access to the company’s financial information helps build trust and generate goodwill among the businesses. It tends to solidify the relationship between different stakeholders of the company. This can help project the growth and access the real potential of the company’s current performance.

Transparency is essential for every company’s stakeholders, whether outside or inside. This further helps finance teams set the tone by actively communicating their ideas and plans with their key investors and stakeholders.

Trial balance

The debit and credit balance computation is done to equalise the total funds. The figures of a trial balance of an organisation can help prepare the final balance sheet of the financial year and can present the financial position of any particular time of the year.

Manual and Automated Systems

There are many mistakes as filing is based on the traditional systems, which are handled manually and is considered a risky system for businesses because it can lead to inaccurate reporting. On the other hand, financial transactions are automatically stored in the database via a software-based system without any errors. Nowadays, most businesses have shifted towards software-based or automated systems, and data can be stored in large volumes. Most companies are availing these systems for increasing the standard and to achieve the key objective of financial reporting.  

Public Interest as a key objective of Financial Reporting

Financial statements don’t have a limited role; they serve the public to make an informed decision about their investments and access the company’s impact over the long run on the nation’s development.

Importance of Financial Reporting

The importance of financial reporting is significant and can’t be underestimated. The financial reports are needed for multiple purposes and reasons by almost everyone, whether they are associated with the company or not. Some of the following points are highlighted below:

• Financial Reporting help companies to comply with various regulatory and statutory requirements. The organisations are mandated to file financial statements before the Registrar of Companiesand different government agencies. In the case of listed companies, quarterly and annual reporting must be filed to stock exchanges and published for the public to inform the potential buyers of the shares to have detailed knowledge about the company.
• Financial Reporting facilitates the statutory audit. The company appoints Statutory auditors to audit the different financial statements of a company and express their opinion on the working of the company.
• Financial Reports are often considered the backbone of strategic financial planning, analysis, standardisation and decision-making.
• Financial reporting helps companies raise funds both in domestic and overseas markets.
• For participation in the bidding process, procurement of government supplies etc., companies are required to furnish their financial statements.

Conclusion

Whether you are an owner or investor of a company, the standard analysis of financial reports is a must and vital for the key objective of financial reporting. From the above discussion, it is clear that financial reporting contains reliable and accurate financial information that various shareholders use for different purposes. Financial Reporting helps clients and potential investors make informed decisions about the business they have already invested in or are planning to invest.A robust financial reporting system promotes good competition and facilitates capital inflows, thus boosting economic development.

Read our Article: What is Financial Reporting Services?