Meaning and definition of financial report
Financial report can be defined as a set of documents prepared generally by companies or government agencies at the closing of an accounting year. Usually, it includes summary of accounting data for that year, including background notes, forms, and other related info. Putting it other way, a financial report is a formal record of a business, entity, or individual’s financial activities.
Types of financial reports
Generally, there are four types of financial reports prepared by a company or business entity. These include:
1. Statement of Financial Position, also referred as balance sheet, it provides reports on the assets, liabilities, and ownership equity of a company at a specific point of time.
2. Statement of Comprehensive Income, also referred as Profit & Loss statement, it provides info about a company’s income, expenses, and profits over a certain period of time. A P&L statement reports about info related to an enterprise’s operations.
3. Statement of Changes in Equity elucidates the changes of a company’s equity all through the reporting period.
4. Statement of Cash Flows informs about the cash flow activities of a company, specifically the operating, investing, and financing activities.
Purpose of financial reports
The main objective of financial reports is providing info related to the financial position, performance, and changes in the financial position of a company. This info is useful to a wide range of users in forming economic decisions. However, a financial report is required to be reliable, relevant, comparable, and above all understandable.
Users of financial reports
- Owners and managers need financial reports to form important business decisions affecting its continued operations. Moreover, these reports are also used as a part of the management’s annual reports to the stockholders.
- Employees require these financial reports for collective bargaining agreements with the management, in case of labor unions, or even for individuals in discussing their promotion, compensation, and rankings.
- Prospective investors use financial reports for evaluating the practicability of investing in a company.
- Financial institutions use financial reports for deciding about whether to provide a company with fresh working capital or expand debt securities for financing expansions and other important expenditures.
- Government entities require financial reports to evaluate the creditworthiness of a business.
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