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Published on:

July 16, 2024

Shaaransh Sharma

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Financial Reporting: Types, Benefits, Objectives, and Limitations

Contemporary businesses depend on financial reporting to furnish them with an understanding of the return they can expect on an investment. Financial reports can help businesses plan for and make good on demands for transparency. When stakeholders can trust what a company presents in its reports, they are much more likely to pony up the capital needed to keep the company going. In this, we'll cover the bases of financial reporting in a way that zeroes in on the Indian business environment.

What is Financial Reporting?

The financial report is where a company tells – in a very condensed way – its performance in the past period. This say-what-happened form is useful largely for investors creditors and other interested parties to make informed judgments about the past period. They (particularly investors and creditors) pay attention to this, and must, for in a very real sense, accurate and transparent financial performance reporting is the cornerstone on which all wraps up into an investment decision.

Financial Reporting Framework

In India, the framework is the set of rules and regulations that can help organizations prepare financial statements, covering everything from the formation of the company's reports to their consistency and reliability.

It also covers how they conform to the company's goals and objectives in comparison and benchmarking of those financial reports against other organizations. The primary frameworks in India at the moment include the Indian Accounting Standards (Ind AS) and the Generally Accepted Accounting Principles (GAAP).

Types of Financial Reporting

It is necessary to understand the various forms of financial reporting to fully grasp the many different ways financial information can be delivered and examined.

1. Balance Sheet

One of the four important financial statements is the balance sheet, which shows the financial status of a company at a specific moment. An accurate balance sheet aids a business leader in assessing the company's true value by providing details about what the business owns, how much it owes, and what is left over for the company’s owners.

2. Profit and Loss Statement

This financial statement is called the Income Statement or the Profit & Loss Report. It summarizes a company's net income, expenses, and profits or losses for a specific period to look at the bottom line. Integrating the information contained in the P&L with insights from the other three financial statements can help you better understand how an organization is operating.

3. Cash Flow Statement

A cash flow statement illustrates the exact amount of cash a business created and consumed during an accounting period. It is derived from the company’s operating, investing, and financing activities.

The statement provides an in-depth view of a company's liquidity and solvency—how a company handles its cash from operations, repays its debts, and meets its current and future financial needs.

Lenders and investors are especially keen to analyze a company's cash flow, as it is the lifeblood of a company and the best indicator of whether a company can meet its cash requirements shortly.

4. Statement of Changes in Equity

The Statement of Changes in Equity is a financial statement that presents how a firm's retained earnings changed over a certain period. Unlike the income statement, which only records the company's gains and losses, the Statement of Changes in Equity reveals the net effect of various business activities. Stakeholders can use this statement to understand the real-world consequences of the company's profits and losses and the impact of the dividends and other distributions made to them as equity owners.

Benefits of Financial Reporting

Financial reporting benefits a business in several ways. They are:

1. Ensuring Transparency and Accountability

Financial reporting makes everything transparent like an open book. That makes a huge difference from a company's viewpoint because it helps a lot in holding the management accountable for the financial decisions they make.

2. Making the Right Calls with the Right Data

A firm must make numerous determinations, ranging from what price to set on a certain item to how much capital to pour into a certain project, and they are backed up by financial reports that provide us with not only historical accounts but also future-looking projections.

3. Ensuring Compliance with Statutory Requirements

Every company has to play by the rules in terms of financial regulations. If a business doesn't make accurate and timely financial reports, it will face legal penalties and loss of trust among stakeholders.

4. Helping in Performance Evaluation

Many companies are public, and for them, external "performance measurement" is a must. And how do they communicate this? Through their financial reports; good reports attract investments whereas bad reports scare away potential shareholders.

5. Attracting Investors

Truly, who wants to invest in a company that seems to have no faith in making regular, reliable financial reports? "Regular" means monthly, quarterly, or yearly. "Reliable" means they are following the Generally Accepted Accounting Principles (GAAP)

Objectives of Financial Reporting

The key objectives that financial reporting tries to achieve can be summed up as follows:

Offer various kinds of user sections, each with specific and relevant information, and timeliness of that information.
Comprise consistently applied set standards, so that any kind of measurable comparable data can allow all different kinds of periods or entities to be analyzed for relative income or position to each other.
Provide a variety of forms of accountability for different levels and natures of outcomes to many different purveyors of those outcomes.
Function in these ways to help purveyors of these outcomes tell the "story" of what's happened both operationally and in a financial sense for the period in question and for the future to come.

Limitations of Financial Statements

While financial reporting offers numerous benefits, it is essential to recognize its limitations to understand its scope and potential drawbacks fully. Key limitations include:

Historical Nature

Usually, financial statements look back at earlier exchanges and situations. They don't do much good in helping you stay up-to-date or forecast conditions for the present or future.

Subjectivity and Estimates

Estimates and judgments frequently factor into financial reporting, and they can have a significant impact on the numbers that get recorded. Valuing a particular asset and determining when and how to recognize revenue are just two examples of where these necessary leaps of faith occur. The problem is that these estimations are rarely transparent and open to opinion, which means they can introduce some pretty potent biases into the final product.

Omission of Non-Financial Information

The traditional financial report centers on financial figures, possibly foregoing important non-financial indicators like the state of the markets, how happy employees are, or how loyal customers are.

Complexity and Accessibility

Non-financial people may find it difficult to comprehend financial reports, which can be quite intricate even to those who are accustomed to dealing with them. Therefore, financial professionals must strive to make financial reports as simple and as understandable as possible for a diverse set of users.

Compliance Over Insight

Occasionally, there is too much of an emphasis on meeting reporting requirements, and this focus can obscure the project's great ideas and the most useful information the project possesses. When that happens, the project is not very awesome.

Conclusion

In the present business paradigm, financial reports are a window into the internal workings of a company. Organizations make use of them to effect change in their operations.

For this reason, clear and reliable financial reporting is essential. If there is any ambiguity at all, stakeholders could get the wrong idea about the company and its prospects.

India uses two frameworks for creating financial reports: Indian Accounting Standards (Ind AS) and Generally Accepted Accounting Principles (GAAP).

Financial reports have their limits, too, of course—limits that are sometimes overlooked in the excitement or urgency of a particular moment. But when you're aware of the promises and constraints that come with working in the world of numbers, you can use financial reports effectively to achieve a whole range of strategic purposes.

Preparing your financial reports can be a hassle. Hence it’s much easier to just let software like Swipe do the work for you. Swipe is compliant with all the Tax laws and makes it easier to generate accurate and reliable reports in no time.

FAQS

Q1. What is Financial Reporting?

The accounting process concludes with financial statements. By financial reporting, we see those statements shared with investors, creditors, etc. The whole point of this communication is to give a transparent picture of a company's performance.

Q2. What are the main types of financial reports in India?

The main types are statutory financial reports, management reports, tax reports, investor reports, and sustainability reports.

Q3. What are the benefits of financial reporting?

There are several benefits, like ensuring transparency and accountability, aiding in decision-making, ensuring compliance with regulations, helping in performance evaluation, and attracting investors.

Q4. What are the objectives of financial reporting?

The goals are to provide essential and up-to-date facts, to enable sound comparisons, to maintain a high degree of trust, and to give a clear and compelling picture of a company's financial performance and the risks it faces.

Q5. What are some limitations of financial reporting?

First and foremost, it is not always up to date. Financial statements tell us about the past; they provide a historical account of what has already occurred. Accountants must make choices from many different calculation methods to come up with the numbers that appear in the financial statements meaning some reports can be subjective.

And finally, no accounting rule book in the world is going to account for every financial event that takes place.