Financial reporting is the process of producing statements that disclose an organization’s financial status to management, investors and the government.
The objectives of financial reporting are as follows:
- To provide useful information to the users of financial reports. The information should be useful from a number of perspectives, such as whether to provide credit to a customer, whether to lend to a borrower, and whether to invest in a business. The information should be comprehensible to those with a reasonable grounding in business, which means that it should not be laced with jargon or burdened with so much detail that it is impossible to extract the essentials about a business from its financial statements.
- To provide information about the cash flows to which an entity is subjected, including the timing and uncertainty of cash flows. This information is critical for determining the liquidity of a business, which in turn can be used to evaluate whether an organization can continue as a going concern.
- To disclose the obligations and economic resources of an entity. There should be an emphasis on the changes in liabilities and resources, which can be used to predict future cash flows.
The preceding objectives were developed within the framework of a capitalist society, where accurate and complete information is needed in order to operate efficient capital markets.
The preceding list is an expanded version of the objectives set forth by the Financial Accounting Standards Board (FASB). The FASB assumed that creditors and investors would be the primary users of financial reports, and so developed a list of objectives that matches their needs.
Financial reporting includes the following:
- the external financial statements (balance sheet, income statement, statement of cash flows, and statement of stockholders’ equity)
- the notes to the financial statements
- press releases and conference calls regarding quarterly earnings and related information
- quarterly and annual reports to stockholders
- financial information posted on a corporation’s website
- financial reports to governmental agencies including quarterly and annual reports to the Securities and Exchange Commission (SEC)
- prospectuses pertaining to the issuance of common stock and other securities
