The Tenets of Financial Reporting
Financial reporting represents one of the most critical aspects of business administrative functions. This reporting communicates the firm’s financial health and helps the business keep proper records for investors, the IRS, and other organizations. Although the rules and best practices vary depending on the type and structure of the business, find out what’s involved with financial reporting.
Four Types of Financial Statements for Publicly Held Businesses
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To fully understand financial reporting, consider how businesses prepare their financial statements. According to the U.S. Securities and Exchange Commission, SEC, publicly held businesses create the following four primary financial statements:
- Balance Sheet: The balance sheet details business assets — such as cash, property, and equipment — and liabilities, or debts. You can also find details about shareholders’ equity, or net worth.
- Cash Flow Statement: Businesses report their revenue and expenses on cash flow statements detailing the company’s operating, investing, and financing activities.
- Income Statement: The income statement details business revenue from all areas of operation, plus the cost of generating the revenue.
- Statement of Shareholders’ Equity: This document details the changes in shareholders’ equity over a specific period.
Each of these statements serves a specific purpose, according to the SEC. Financial reports become interrelated since each statement draws upon and connects with figures and conclusions contained within other statements.
Transparency for Investors and Lenders
Although private companies operate under different financial reporting rules, all companies can benefit from issuing financial statements. According to Inc. magazine, financial reporting helps investors and lenders make decisions about a business. For example, if a company wants to secure a real estate loan, potential lenders will want to know about its revenue, expenses, and other financial health facets.
Similarly, as the SEC details, the public can study financial statements to make decisions about stock purchases and trades. If you can read and interpret financial statements, you can learn about a company’s assets, revenue, debts, and other key variables. With training, graduates of master’s degree-level accounting programs can prepare these detailed reports for their employers. The reports, in turn, can help the public make informed decisions and make sure the company follows SEC regulations.
Filing Reports — Not Once and Done
Companies don’t prepare financial reports only once. According to the SEC’s Office of Investor Education and Advocacy, public companies must submit financial reports both quarterly and annually. Data for the SEC’s forms often come directly from the balance sheet and other financial statements.
According to the SEC, businesses can prepare income statements, cash flow statements, and other reports every year or every few months, depending on their specific needs. For example, the balance sheet typically includes debts due within a year of the balance sheet’s release date.
Whether a company goes public or remains private, financial reporting is a complex and fundamental part of a business. Given the importance of financial reporting, businesses must rely on accounting professionals who can prepare detailed financial statements following regulatory laws and internal policies. As you pursue your accounting degree, consider how you can prepare yourself to create better financial reports for your future employer.
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