Financial reporting refers to the act of organizations communicating accounting information at the end of the accounting period through financial documents. These documents contain the analyzed and summarised data for a particular trading period with other accompanying information like notes and forms. The examples of financial reports include organizations’ income statements and balance sheets. Another common financial report is the cash flow statement. Ideally, financial reporting serves as a principle source of disclosure of the financial activities of an organization. In this regard, it entails the resources allocation documents in an organization. This implies that financial reports are significantly important to both an organization and the external parties in the evaluation and analysis of the organization (Revsine 21).
There are multiple users of prepared and presented financial reports. The common groups include management, equity investors and loan creditors. In addition, employees, analyst advisers, business contact groups, governments and the public make a significant use of financial reports (Alexander 12). For each individual group, there is varied information gained from such reports, which influence the general rating of the organization. Initially, the output of financial reporting is used by management to check for the effective allocation of resources, effects, and general conduct of a business. In this regard, management can obtain information on whether its performance is as expected in the market or there are some weaknesses. On this note, appropriate measures are taken to improve or maintain the business either before or after the disclosure of the reports to other external parties.
The Loan creditors’ main interest in analyzing the financial reports of an organisation is to ascertain whether they can meet their liabilities. The asset base of the organisation compared to the liabilities that need to be sustained influences this factor. Consequently, if the organization is highly rated financially, creditors will be willing and can offer a significant financial funding. Similarly, employees’ key concern regarding financial reports is to check for the present and future job security. Additionally, employees could use financial reports for a fair and open collective bargain with the assistance from their trade union representatives. These factors are influenced by the economic stability and the vulnerability of an organization to liquidation due to the information contained in future financial reports.
Analyst advisers are independent organizations or groups of individuals who offer financial advices. Their major interest in the financial reports of an organisation is to ascertain its rating in the stock exchange if the organization is listed. Analyst advisers have a high influential capability to the nature of which the potential and existing investors of an organization understand the company’s performance and their decisions. Business contact groups include suppliers and trade creditors, customers and competitors. All these groups perceive the level of the performance of an organization as presented in financial reports as the determinant of their relationship with the organization. The trade creditors and customers have the incentive to engage in business with a successful organisation while competitors have the opportunity to learn from the successful organisation, identify, and develop appropriate solutions to the various challenges.
Concerning governments, financial reports are essential for taxation and economic decisions. Governments use financial reports to determine the appropriate taxes that are supposed to be remitted by organizations. Additionally, financial reports help governments in making crucial economic decisions of their countries, which affect the economy as a whole. Concerning the public, financial reports are essential in checking an organizations’ performance and its role towards social corporate responsibility. At times, the ethical standards of an organization regarding matters of pollution, health and use of energy, determine its overall performance, which has an impact on the public.
The financial reports preparations are based on the asset, liabilities and sources of finance that an organization holds. In this regard, resources are analyzed based on the present and past resources, the changes made, and the expected future resources. This implies that an organization’s progress and performance is represented on a snapshot at the end of the trading period. Financial reports reveal what an organisation perceives to be of value to it regarding the day-to-day duties and events. On this note, notes and forms are crucial in disclosing other additional information that could be missing in the reports.
The financial reports accuracy is ascertain and confirmed by independent and certified auditors. Auditors’ main responsibility is to obtain and evaluate the misappropriation of funds, frauds, and errors existing in the reports (Alexander 225). At the end of their exercise, they give their opinions regarding the validity of the financial statements they have analyzed. An acceptable opinion that portrays the ideal condition of the financial reports would be a qualified opinion. In this regard, a qualified opinion depicts the varied strengths and probably some of the weaknesses in the analyzed reports. Based on this information, an organization gains insight of its strengths and weakness and employs the appropriate measures before the disclosure of information to the public.
The main financial reports are published to the end users income statements and balance sheets. These two financial reports portray an organization’s financial performance and position at the end of the trading period respectively. About an income statement, an organisation discloses the information regarding its means of revenue generation and the identified expenses and costs. Additionally, the amount of tax to be remitted and the dividends attributed to shareholders are indicated to determine the net profit or loss of an organization. The balance sheet depicts the overall asset base, liabilities and sources of finance of an organisation. With the information derived from the two reports, financial ratios and cash-flow statements can be generated and published. The end-users can use the published information to meet their needs.
Management reporting entails the communication of the accounting information of the economic activities within an organization. These economic activities refer to the processes that occur within an organization for the production of the desired outputs demanded by consumers. The main processes assessed for management reporting include the products under production, materials used, labour involved, amount of production and other relevant resources. The formulation of reports that present this information assists managers in planning, performance evaluation and operational control. Additionally, employees use management reports to analyze their contribution and the possible measures that they should input to improve their performance (Alexander 188).
In planning, management uses the reports to determine the appropriate product to produce and where and when to produce it. In this regard, the management defines a clear outline of the products or services that would be marketable and profitable to the organization. The identification of means and places of production enables the management to focus its efforts and resource in appropriate production. Similarly, the management can determine the materials, labour, and other resources necessary for the achievement of desired output. In this regard, an organization can input resources that would meet the expected output creating an appropriate way of using its resource (Revsine 189). Additionally, operational control is another critical area that determines the work in progress. It determines the work in process in the factor flow and stages of completion, which assist line managers in maintaining a smooth flow of production. This is a crucial point of identification of the bottlenecks in the production process and the employment of appropriate measures.
The process of performance evaluation is significantly essential in determining the profitability of each individual product and product lines. On this note, an organization evaluates each product’s contribution and the effectiveness of the product line to ascertain the ideal ones. The selection of the appropriate products and product lines boosts the organisation performance and profitability. Similarly, the process of performance evaluation can be used to determine the level of contribution of different managers within an organisation. In this regard, at the period of matching the surplus and deficit labour influenced by the forces of demand and labour, an organization can appropriately determine the individuals to retained or dismiss. Nevertheless, an organization evaluates the means in which it can boost the morale of effective managers by identifying the appropriate ways of compensating them.
About the end-users, who are the management and employees plans of production, the performance evaluation and work in progress are presented in management reports. These reports assist them in performing their duties effectively. At some point, the management identifies their weaknesses and strengths from the reports, which considerably help them to solve some anticipate challenges. The information acquired is use to enhance effective service delivery in the organisation.
The three primary financial statements include balance sheets, income statement and cash flow statement. The balance sheet provides detailed and analytical information regarding an organization’s assets, liabilities, and sources of funds (Wahlen 112). Assets are things that the organization owns and uses to generate products or services. Assets could either be fixed, current, or non-fixed non-current assets. Fixed assets include the physical property like plants, automotives and equipment. Current assets are inventory cash and debtors. An example of non-fixed non-current assets is goodwill. On the other hand, liabilities are the value of money that an organization owes suppliers and other providers of basic elements in business. The sources of funds mainly entail the money acquired through the shareholders contribution or any other form of funding like banks or issuance of fixed income instruments.
An income statement of an organization refers to a statement that takes into consideration the costs and expenses incurred concerning the generation of revenue. This statement depicts the net profit or loss of an organization at the end of a trading period. At the same time, an income statement reports the value of earning per share. This refers to the amount that the shareholders are supposed to obtain at the end of a trading period. Furthermore, it displays the dividend policy used by an organization in the issuance of its dividends (Wahlen 145). On the other hand, cash flow statements indicate the ability of a company to generate cash. Contrary to an income statement, which indicates whether an organisation has made a profit or a loss, a cash flow statement indicates whether there was cash generated. It uses the principle of evaluation of the inflow and outflow of cash. In this regard, operating, investing, and financing activities are analyzed to determine the amount of cash at an organization’s disposal.
Typical monthly accounting closing procedures are adjustments made to the financial records of an organization at the end of the month. These records include the payroll, purchasing, counter sales, accounts payable, account receivable and the general ledger. Regarding the payroll, it is essential at the end of the month to post all the monthly earnings to each respective section before closing and resetting it for the next month. In case of any accruals, an organisation should transfer the value to the next month’s payroll. The purchasing or inventory acquired during the month should be analyzed to determine if there are any debts. After ascertaining its nature of acquisition and payment level, the settled debts are closed while any unsettled debt is posted to the next month ledger of inventory. Counter sales refer to the sales within an organisation in a month. In this regard, adjustments should be prepared for the entries of sales made in credit that have been repaid and those that have not in order to be transferred to the next month (Wahlen 220).
Accounts payable for the month are adjusted to determine the unsettled value and settled value. The unsettled value is carried forward to the next month while the settled valued is closed within the month. On the other hand, accounts receivable are adjusted to check for the value of the money received concerning the receivables of the month. Any receivable settled would be closed within the month while the remaining debt is transferred to the following month. After making adjustments with respect to each individual account, the values are posted to the general ledger to ascertain the figures of the closed transactions within the month. Later on, a trial balance is prepared for the evaluation of the accuracy of the transactions made within the month. Other values, which have not been closed within the month, are reposted to the following month’s ledgers.
Liquidity refers to the ability of an organization to convert its assets into cash. This ability influences an organization’s capability to settles its obligations. Therefore, an organization must plan its assets appropriately in order to cover for any eventuality about the settling of debts (Revsine 140). Consequently, the manner in which an organisation invests its funds influences its capability to meet liabilities. In this regard, an organisation should properly plan the proportions of investing to compose all forms of investments while taking into consideration the ease of converting it to liquid form. For most organizations, their policies define the proportions to which permanent and illiquid assets like real estate and liquid assets like shares and government bonds can be allocated. However, it is crucial to note that maintaining liquid amounts at hand could be costly and imprudent since they lose the time value. Additionally, optimum returns from varied investments are not possible with the maintenance of large sums of cash at hand.
Financial statements reflect the liquidity of an organization through their ability to provide the values for finding liquid ratios. Liquidity ratios like cash and acid test ratios, indicate whether an organization is in a position to meets its obligations. At the same time, the nature of the investments undertaken by an organization portrayed in financial statements, indicate whether they are liquid assets, which can be used to cover any emerging needs. In this regard, the amounts of liabilities influence the liquidity decisions of a company. In this regard, business managers must be knowledgeable on the matter. The acquisition of this knowledge enables a business manager to become considerably critical in terms of liquidity decisions. He or she can subdivide the available funds and direct them to multiple investments with different returns and varying liquidity nature. Consequently, an organization will not be exposed to the risk of adverse effects of liquidity.
General Accepted Accounting Principles (GAAP) are international policies and procedures that regulate the preparation and presentation of financial statements. These principles assist both multinational and national organizations in the formulation of similar financial statements (Revsine 360). Despite the variation in the currencies and accepted accounting policies of each country, there still exist uniformity in the statements. This implies that GAAP creates convenience and simplicity in the preparation and analysis of financial reports. At the same time, the standardisation of accounting policies has created an uncomplicated avenue for international investing and market. Additionally, financial reports can be analyzed with ease on the international scale.
Cash Basis accounting is different from accrual accounting. Cash Basis accounting entails the recording of financial transactions based on the value of money that has been actually received or given out. This approach of accounting considers that the net-worth of an organization is based on the value of cash within its disposal or in its form of investments. On the other hand, accrual accounting entails the recording of financial transactions that have either been incurred or received regardless of whether money has been paid or received. This approach assumes that whatever the expenses undertaken by an organization are bound to settle or any service or product sold is bound to be paid for at some future specified date (Revsine 185).