As we usher in the next few weeks to the end of the semester, I cannot help but reflect on how it all started with corporate financial accounting. Being able to understand and interpret annual reports of companies has been one of the highlights of my journey in LBS. Let’s talk about financial reports.
An annual report is a comprehensive report detailing a company’s activities throughout the preceding year.
Annual report contains much more than mere financial statements.
It has a broader scope and in addition to quantitative financial information, it includes qualitative information such as letter from the CEO of the company, directors’ report, chairman’s statement, sustainability report etc
A financial report shows the financial summary of an company in a given period (i.e. monthly, quarterly, semi-annually, annually). It is the end product of the account process. It is also known as financial statement
Nature of Financial Report
- A financial report is historical in nature
- The report shows transactions that are expressed in monetary terms
- It records only financial transactions
- It is based on certain accounting concept, convention and principles
Objectives of Financial Report
- To assist management in taking effective decisions, relating to the firm objectives and overall strategy.
- To know the current position of the firm in terms of assets, liabilities, equity, expenses and incomes
- To demonstrate stewardship i.e how an organization is utilising and managing the firm’s resources
- To assist management in planning, monitoring and controlling
- To disclose information about an entity’s economic resources
- To facilitate statutory audit
The question now is who is responsible for preparation financial statements?
The management/directors of a company are responsible for the preparation of the financial statements
Key participants in the financial reporting supply chain
- Management
- Directors
- External Auditors
- Stakeholders
Some of the internal users of the financial report include
- Management
- Shareholders
- Employees
Some of the external users are:
- Tax authorities
- Government
- Lenders
- Creditors
- Auditors
- Journalist
What do internal users use financial report for?
- Planning,
- Evaluating and
- Controlling firm operations
What do external users use financial report for?
- Assessing past performance and current financial position
- Making predictions about the future profitability and solvency of the company
- Evaluating the effectiveness of management
Characteristics of Ideal Financial Report
- Relevance
- Reliability;
- Understandability
- Comparability
Elements of Financial Report
- Asset (non-current and current assets)
- Liabilities (non-current and current liabilities)
- Equity (owners funds)
- Expense
- Income
Components of financial report
- Statement of Income
To ascertain the firm performance (is it the firm making profit or loss)
Statement of Financial Position
To ascertain the worth of the firm (i.e. assets, liabilities and equity)
- Statement of Cash Flows
Shows the firm’s cash inflows and outflows.
It is divided into
- operating activities,
- financing activities and
- investing activities
- Statement of Changes in Equity
Measures changes in owners’ equity in a given period
Benefits of financial report
- It provides information about a firm performance (revenue, expenses and profitability)
- It provides information about a firm worth (assets, liabilities and equity)
- It shows whether the firm has the ability to meet its short and long-term financial obligations
- It guides the investors whether to invest or withdraw their investment from the firm
- It guides the lender whether to accept or reject a loan request
- It is used by management for planning, managing and control
- Management use the report to assess how effective their policy has been.
Limitation of Financial Report
- The report is historical in nature.
- The report does not provide qualitative information.
- The report is financial in nature.
- The report is prepared under certain assumptions that may be unrealistic with time
- The report provides aggregate information.
- The report does not consider the effect of inflation
This brings us to the end of Accounting 101
#MMBA3
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