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Slide 2: Meaning of Financial Reporting<br>Slide 3: Users of Accounting Information <br>Slide 4: Objectives <br>Slide 5: Function<br>Slide 7: Financial Statement<br>and so on.......
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Meaning of Financial Reporting: • Financial reporting refer to the communication of financial information, like financial statements , to the financial statement users , like investors and creditors. Financial reporting is typically viewed as companies issuing financial statements. • A general purpose set of financial statements include a balance sheet, income statement, statement of owner’s equity, and statement of cash flows, but financial reporting is much more broad than just as set of financial statements.
Objectives of Financial Reporting: • Providing information to investors, promoters, creditors etc, which is used to enable them to make rational decisions regarding investments. • Providing information to shareholders and public at large in case of listed companies about various aspects of business. • Providing information to management of an organization which is used for the purpose of planning, analysis, and decision making. • Providing information to statutory auditors so that they facilitate audits. • Enhancing the social welfare by looking at the interest of employees. • Providing the information as how organization procuring and using various resources.
Functions of Financial Reporting: • Backbone of financial planning: • Financial reporting is the backbone of the financial planning, analysis and decision making. It is used by various stakeholders for various other purpose of their own. • Facilitate statutory audit: • It helps the statutory auditors to express their opinions and views on the audit done by him for financial statements of company. • Helps the organization in comply with regulatory requirements: • With the help of FR, organizations are required to file their financial statements to ROC, Govt. agencies.
Function of Financial Reporting: • Helps in raise capital: • FR helps the organization in raising both the capitals domestic as well as overseas. • Helps public in easy analyze the performance of companies: • Better presentations: • FR helps to present all information in better way including all financial statements and communications. • Better Decision: • FR also helps in taking better decisions by way of safeguarding timely.
Balance Sheet: • A balance sheet provides a snapshot of an organization’s financial position at a specific point in time. • It lists an organization’s assets, liabilities, and equity, showing what the organization owns and owes. • The balance sheet is used to determine an organization’s financial health and stability.
2) Income Statement: • An income statement , also called a profit and loss statement, reports an organization’s revenue and expenses over a specific period of time. • It shows the organization’s net income or loss, which is the difference between its revenue and expenses. • The income statement is used to evaluate an organizations profitability.
3) Cash Flow Statement: • A cash flow statement reports an organization’s inflows and outflows of cash over a specific period of time. • It shows the organizations cash receipts and payments, and provides information on how the organization generates and uses its cash. • The cash flow statement is used to evaluate an organization’s liquidity and cash management.
4) Statement Of Changes In Equity: • It is a financial statement which summarizes the transaction related to the shareholder’s accounting period. • A statement of change in equity (also referred to as statement of retained earnings) is a business financial statement that measure the changes in owner’s equity throughout a specific accounting period. • It covers the following elements; • Net profit or loss. • Dividends payments.
5) Notes To Accounts: • Notes to the accounts detail and comment on the information presented in the balance sheet, income statement, and cash flow statement. • Notes to the accounts are the additional information and explanations that accompany the financial statements. • They provide more details and clarity about the items, amounts, and transactions reported in the balance sheet, income statement, statement of changes in equity, and cash flow statement.
Limitation of Financial Reporting: Financial statement are tools and not solutions: Financial reports show the profitability of the firm and the financial strength as well. But it does not say anything about how you will improve the numbers and develop the business. So, it proves to be a good measuring tool but no solution to the negative results. Financial Report are not futuristic: • Financial statements give the data from last year, and hence it is historical and the results cannot be applied directly to forecast anything in the future. • However, the stakeholders and creditors are more interested in the future position of the firm so that they can make business decisions based on that.
It does not consider the qualitative Aspects: The financial reports show the only numbers. It lacks the consideration of human resources in the accounting process. It neglects the efficiency, technical know-how, and profitability of its employees. Hence it does not measure the qualitative aspect involved in the business. In the absence of reliable data, it can give misleading results: • They are calculated based on the data provided by the firm. • If the data is not reliable enough, the results could mislead. • Hence, it’s not completely reliable.
It ignore the changes in price level: • In certain cases, the prices of commodities change frequently. However, the financial reports are made, considering the current rates. • Hence, if the price changes are not accounted for, the results could be misleading. • In some cases, the efficiency may increase by considering the new prices, but the actual efficiency may remain less due to uncertainty.
Qualitative Characteristics of Financial Reporting • 1. Relevance. • 2. Faithful representation: • This depiction implies that the financial information is complete, neutral and free from error. • 3. Comparability: • The characteristic of comparability implies that users of financial statements must be able to compare aspects of an entity at one time and over time, and between entities at one time and over time.
Qualitative Characteristics of Financial Reporting • 4. Verifiability: • The characteristic of verifiability provides assurance that the information faithfully represents what it purports to be representing. • 5. Timeliness. • 6. Understandability: • The financial reports are prepared with the assumption that its users have a ‘reasonable knowledge’ of the business and its economic activities.
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