What is the importance of financial reporting?

Financial Reporting is a common practice in accounting where the financial statements of the company are disclosed to present its financial information and performance over a particular period. It is important to know where a company’s money comes from and where it goes.

Types of Financial Statements

There are 4 important types of financial statements such as:

• Income Statement: This statement summarises a company’s revenue, expenses and profits. It is prepared to calculate the net profit of the company.
• Balance Sheet: It portrays the company’s assets and liabilities in a statement. This is used to understand the financial position of the company.
• Statement of Retained Earnings: This statement reveals a company’s changes in equity during an accounting period.
• Cash Flow Statement: It shows the amount of cash flowing in and out of the business. It is helpful in understanding the liquidity position of the business.

Importance of Financial Reporting

• Understanding these financial statements is helpful in making financial decisions. One can identify certain trends and hurdles while analyzing financial statements.
• It helps the top order management to keep a check on its outstanding debt and how to manage them effectively.
• Financial reports are also required to be prepared by law for tax purposes. Therefore these statements have to be prepared to calculate taxable income. It also ensures that the companies are compliant with the required laws and regulations.
• True and accurate financial reporting is also important for potential investors who need to understand the financial performance and position to come to a decision.