Assistant Professor, Sanskriti School of business (AICTE Approved) mobile 9825773009

ASHISH SIDDIQUI, MBA.M.COM

PRESENTATION BY

Compiled by Ashish Siddiqui MBA

Financial reporting is the process of providing financial information in regards to a company's position, performance and flow of funds for a specific period which are then provided to external users. In other words financial reporting is the communication of financial information useful for making investment, credit, and other business decisions (Wild, Shaw, & Chiappetta, 2009, p. 681) Such communications include general purpose financial statements such as income statements, balance sheets, equity reports, cash flow reports, and notes to these statements.

Compiled by Ashish Siddiqui MBA

It is useful to existing and potential investors and creditors and other users in making rational investment, credit, and similar decisions; helps existing and potential investors and creditors and other user to assess the amounts, timing, and uncertainty of prospective net cash inflows to the enterprise; identifies the economic resources of an enterprise, the claims to those resources, and the effects that transactions, events, and circumstances have on those resources.
Financial reporting should provide information to the directors and management to take various decision in the interest of its owners. The primary focus of financial reporting to provide information about enterprises performance during the particular period provided by the measure of earning and its components.

Compiled by Ashish Siddiqui MBA

There are two broad categories of interested parties, or Financial reports users:
EXTERNAL INTERNAL

USERS
USERS

Compiled by Ashish Siddiqui MBA

Investors (i.e., owners), who use accounting information to make buy, sell or keep decisions related to shares, bonds, etc. Creditors (i.e., suppliers, banks), who utilize accounting information to make lending decisions. Taxing authorities (i.e., Internal Revenue Service), who need accounting information to determine a company's tax liabilities. Customers, who may need accounting information to decide which products to buy from which companies.

Compiled by Ashish Siddiqui MBA

Managers and Owners: For the smooth operation of the organization, the managers and owners need the financial reports essential to make business decisions. So as to provide a more comprehensive view of the financial position of an organization, financial analysis is performed with the information supplied in the financial statements. The financial statement is used to formulate contractual terms between the company and other organizations. Employees: The financial reports or the financial statements are of immense use to the employees of the company for making collective bargaining agreements. Such statements are used for discussing matters of promotion, rankings and salary hike

Compiled by Ashish Siddiqui MBA

Understandability While financial statements can be somewhat complicated for the uninitiated to understand, users must be able to understand the information within them. This applies to the format/ layout of the statement, the terms used in the statement and the policies, methods and assumptions utilized in preparing the statement.
Users of financial statements are assumed to have sufficient knowledge to study the information properly. Understandability ensures that a user equipped with the basic knowledge can discern information pertaining to the performance and financial position of an enterprise.

Compiled by Ashish Siddiqui MBA

Relevance Since financial statements are for users to make economic decisions, the information must be relevant to the decisions that those users have to make. Once all items in a financial statement help users to assess historic or future events, the information in the statement relevant to the users. Whether the information affects the economic decisions of users (materiality) and the nature of information affect relevance as well. Materiality is one of the assumptions used in financial reporting that contributes to relevance.

Compiled by Ashish Siddiqui MBA

Materiality
Information is material it its misstatement, i.e., either omission or erroneous statement, could influence the decision of users taken on the basis of the statements. Materiality depends on the size and nature of the item or error, judged in the particular circumstances of its misstatement. Materiality affects relevance.

Compiled by Ashish Siddiqui MBA

Reliability In the context of accounting, "reliable" information is free from material error (errors that affect the economic decisions of users) and bias. In other words, a reliable financial statement must fairly and consistently present information about the performance and financial position of an entity. Users must have confidence in the financial statement, without it being misleading or deliberately constructed in a manner that presents the entity in a favorable light. The main thrust of the auditing function is to reinforce the reliability of information presented in financial statements. It has many implication viz.. Faithful representation, substances over form, neutrality, prudence ,completeness and comparability

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Faithful representation: The requirement for consistency between statements and economic reports and the the company. Accounting reports should reflect the verifiable financial position including company performance.

claims made in financial actual financial state of accurate, reliable and debt, cash flow and

substances over form : It is necessary to account for and present transactions in accordance to their substance and economic reality and not merely their legal from. prudence: This refers to inclusion of caution and care to be taken in reporting the data so that the assets or income are nor overstated and liabilities or expenses are not understated.

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Neutrality: The information presented in the financial statement should be free from bias that is the manner of presenting the data should be not be such that it influence the decision taker. Completeness The information contained in the financial statement should be complete within the bound of materiality and cost. Comparability: Comparable Financial report is useful because it tells us the story of the business so we can compare it with prior periods and with other companies in the industry, the country, the region or even the whole world.

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There are three components to a companys financial statements as part of their annual report:

Income Statement How good the company is at making money Balance Sheet How they're paying for their operations and their future growth Cash Flow Statement What the company owns and owes

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