Financial reporting is an accounting procedure for disseminating financial data. Financial reporting is all about the process of informing shareholders and other potential customers (like the general public and regulators) regarding a company’s financial performance. Financial statements like the statement of assets, statement of income, and cash flow statement are the main components of financial reporting. Every business does financial reporting either internally or externally, or both.
What is Financial Reporting?
Preparing financial statements that present a true statement about the organizations financial position at the closure of an accounting period constitutes financial reporting. And it is basically an official record of all financial transactions taking place inside of a company. These reports help both internal and external financial information users to evaluate the performance, liquidity, and financial strength of the organization. Organizations usually prepare financial reports to show the financial implications/impact of the activities on the organization. The main objectives of financial reporting are:
- To provide multiple information to the users of financial statements.
- To show what a company has and owes.
- To assess the creditworthiness of a company.
Major Types of Financial Reports
Every business, small or large, prepares financial reports. These reports are of paramount importance in gaining access to and metrics on the profitability, liquidity and efficiency of the business. So, understanding different types of financial reports can help users of financial reports understand the financial condition of a company.
Income Statement
An income statement presenting revenue, profit (or loss) and expenditure incurred over an accounting period. It helps in calculating profit or loss. You draw the line after every accounting period. It helps in calculating profit or loss. You draw the line after every accounting period. Then, it subtracts expenses from operating and non-operating revenues.
Balance Sheet Statement
A balance sheet is reporting that displays the financial position of a business. It shows the equity liabilities and assets at the end of the accounting period. The net worth of a company refers to the total assets, which are reduced by the liabilities. Then, it subtracts expenses from operating and non-operating revenues.A balance sheet is the most productive statement to give information about the company’s financial situation.
A balance sheet consists of assets, equity, and liabilities.
Cash Flow Statement
Cash Flow Statement is a statement showing the movement of inflows and outflows of cash and cash equivalents during the specific period of time. It is of three types: operating, investing and financing activities.
Owner’s Equity Statement
Financial statement that presents equity changes, additional contributions from owners, and how much equity was remaining right after a reporting period. It shows all of the equity flows for the accounting period. It includes buying or selling stock, paying dividends, and more. These four are major types of financial reports.
Users of Financial Reporting
Financial reports are designed to give their readers information about the financial performance of a company. The importance of financial reports in the business and economic environment is dependent upon the knowledge of whom relies on them and for what reason. Now every user has its own purpose and objectives to use financial reports. There are two type of users of financial reports: internal and external users.
Internal Users
- Workers or Trade Unions: To learn how profitable the company is as incentives and compensation are determined by the company’s performance and position.
- Management: To reach a goal by making business decisions and evaluating performance against historical performance.
- Owners or shareholders: To learn about the company’s financial standing and progress.
These 3 are the internal users of financial reports.
External Users
- Customers: To understand the company’s profitability and financial health.
- Government: To know the financial status of a company to enforce law and put taxes.
- Agencies: To make sure that all regulations, guidelines, and accounting standards are being followed by the company.
- Investors: To observe the business’s development and learn regarding the safety of investment.
- Financial Institution and Creditors: To determine the liquidity and financial footing of the company prior to extending loans to business. To determine the long-term creditworthiness of the company.
All these comprise the external users of financial reports.
Importance of Financial Reporting
Financial reporting is an essential part of today’s business environment. It also helps to present more accurate and honest picture of a business performance with regards to profit. Creditors, investors and shareholders require information about business operations, which financial reporting provides. It allows them to get access risks and opportunities of business. The following points emphasize the need for financial reporting:
Navigate Accuracy
Accounts are created according to the computing rules and regulations. There are regulatory firms that can oversee these reports. It can help ensure compliance with financial reporting standards and tax laws for all financial reports. Accurate financial reporting allows the faster fulfilment of mandatory financial obligations.
Communicates Business Financial Health
Financial reporting provides information about a company’s financial performance to shareholders, creditors and investors. Creditors rely on financial reports to analyze the creditworthiness of a company. Investors use financial reports to assess risk involved in a business and future prospects. Shareholders are interested in knowing the profitability position through financial reports.
Helps to Manage Debt and Budget
Financial reporting analyzes financial documents to know business income and expenses on a regular basis. This technique of documentation gives descriptions about current assets and liabilities. It further helps to access key performance indicators like debt-to-equity ratio.
What are Financial Reporting Standards?
Every nation has its own rules and regulations for financial reporting. Multinational companies have to abide by the regulatory framework of any nation where they want to do business. There is a tremendous need to introduce uniformity, rationality, comparability, transparency, and adaptation to the financial statements in this era of fast globalization. Globally varied accounting standards are detrimental to the public interest. Since, investors and analysts prefer to compare financial accounts using standard accounting standards.
Convergence of accounting and financial reporting standards encourages free movement of foreign investment. Additionally, it reduces the risk of errors. It makes it easier to evaluate investments across the world.
This convergence has made a great difference in the current times.
International Financial Reporting Standards (IFRS)
International financial reporting standard became a single world stage for business transactions. The ultimate goal is a consistency of corporate accounts worldwide.. They slowly are replacing the various national accounting standards. Accountants are required to comply with these standards for the use of both internal and external users. It helps to conveniently large, quirky, adjustable books of accounts.
Indian AS (Ind AS)
Indian Accounting Standards (IND AS) refers to the set of accounting standards released by the Ministry of Corporate Affairs, India. The accounting standards of Indian accounting standards is akin to the International Financial Reporting Standards (IFRS). In India, while there are two standards of accounting, one is IFRS-converged Indian Accounting Standards (Ind AS) and other is the present accounting standards under the Companies (Accounting Standard) Rules, 2006. IFRS and the Ind AS have the same numbers and names.
Relevance to ACCA Syllabus
Financial Reporting (FR) is one of the key papers for the ACCA qualification. Consistent with International Financial Reporting Standards (IFRS), it provides a strong basis for the generation, evaluation, and interpretation of financial statements. The subject is important to understand as it is practical working on bookkeeping or finance roles. It aids in your transition towards higher-end papers such as Strategic Business Reporting (SBR).
Financial Reporting ACCA Questions
Q1: Which of the following treatment is correct with regards to a revaluation gain according to IAS 16 Property, Plant and Equipment?
A) Recognize in profit or loss
B) Record in retained earnings
C) Recognize in the revaluation surplus in OCI
D) Recognize as a liability
Answer: C According to IAS 16, a revaluation surplus is recognized in other comprehensive income, and is accumulated in equity under the heading of revaluation surplus.
Q 2: Under IFRS 15 Revenue from Contracts with Customers, when is revenue recognised?
A) Once the contract is signed
The point of transfer of control of goods or services to the customer.
C) When payment is received
D) When inventory is produced
Answer: B According to IFRS 15, revenue must be recognized as soon as control over goods or services transfers to the customer, that is, the transfer of risks and rewards.
Q 3: What of the following would NOT be definition of current liability in Financial statements?
A) 3 month trade payables
B) Tax payable within six months
C) 5-year bank loan payable.
D) Current portion of long-term loan
Answer: C A loan from a bank repayable in 5 years will be a non-current liability as it will not be discharged within 12 months.
Q 4: Which of the following is an adjusting event in accordance with IAS 10 Events After the Reporting Period?
A) Material Business Combination Subsequent to Reporting Date
B) Dividends declared after the reporting date
C) Fraud affecting previously-issued financial statements.
D) Two for One (2 for 1) shares issued post the reporting period.
Answer: C An error or fraud is discovered in relation to the previous reporting period is an adjusting event, as it indicates evidence of condition that existed at the date of reporting.
Q 5: The concept of matching in connection with financial reporting is best described as:
A) Revenue is recorded upon the receipt of cash
B) Expenditures are only accounted for when they are paid
C) Expenses must be matched against revenues that they help to generate
D) Assets = liabilities + equity
Answer: C The matching principle allows expenses to be recorded in the same period that related revenues are earned (and recorded) to indicate accurate profit.
Relevance to US CMA Syllabus
It is critical in Part 1 of the US CMA exam, which focuses on financial reporting. Its focus is on identifying and valuing financial features. In addition, It helps in the preparation and interpretation of financial statements as per relevant standard(GAAP/IFRS). It also ensures accuracy, transparency and ethical reporting. This is a field in which proficient CMAs are sure to be able to assess financial performance and having the ability to effectively communicate findings.
Financial Reporting US CMA Questions
Q1. Which of the following is NOT one of the three major financial statements?
A) Balance Sheet
B) Retained Earnings Statement
C) Cash Flow Statement
D) Trial Balance
Answer: D) Trial Balance- The trial balance is an aspect of the accounting cycle, not a category of financial statement.
Q2. When is revenue recognized under accrual accounting?
A) When cash is received
B) When an invoice is issued
C) At the time it is earned, regardless of whether the cash is received
D) At the end of the financial year
Answer: C) When it is earned, regardless of cash receipt: Under the accrual basis of accounting, following the revenue recognition principle, revenue is recognized when it is earned and realizable.
Q3. Which of the following describes a defining trait of faithful representation in financial reporting?
A) Timeliness
B) Predictive value
C) Completeness
D) Relevance
Answer:C) Completeness: Faithful representation should include completeness, neutrality and free from error. Finally, relevance can be described on two dimensions, timeliness or predictive value.
Q4. Focus, What is the statement of cash flows purpose?
A) To measure profitability
B) To inform project retained earnings
C) To show changes in equity
D) To describe cash inflows and outflows during a period in time
Answer: D) To report cash inflows and outflows during a period. It gives information about a company’s liquidity by showing cash movements in operating, investing, and financing activities.
Relevance to CFA Syllabus
A Crucial Topic in the CFA, Particularly at Level I and Level II It serves as the foundation for investment decisions and financial analysis. Aside from a basic understanding of the fiscal environment, CFA candidates need to be able to apply US GAAP and IFRS standards, interpret financial statements, and evaluate the effect of accounting choices on reported results. Portfolio management, credit research, and equity valuation require this knowledge.
Financial Reporting US CFA Questions
Q1. What is not reflected in the income statement in accordance
with IFRS?
A) Revenue
B) Operating profit
C) Other comprehensive income
D) Profit before tax
Correct Answer: C) Other comprehensive income: Other comprehensive income is reported in the statement of comprehensive income, and is not part of the income statement.
Q2. In contracts with more than one performance obligation, when should revenue be recognized under IFRS?
When all obligations are met A)
B) When payment is received
C) As each performance obligation is satisfied
D) As of the end of the reporting period
Answer: C) As each performance obligation is satisfied-IFRS 15 makes it clear that revenue should be recognized as and when each distinct performance obligation is satisfied.
Q3. What is a primary qualitative characteristic of useful financial information as per IASB Framework?
A) Timeliness
B) Verifiability
C) Relevance
D) Comparability
Answer: C) Relevance- makes financial information useful.
Q4. Which inventory cost flow assumption is not permissible in US GAAP?
A) FIFO
B) LIFO
C) Weighted average
D) Specific identification
Answer: (B) LIFO — IFRS does not allow LIFO while it can be used under US GAAP. The inverted version of the question tests awareness of that distinction.
Q5. A company changes from capitalizing an item to expensing an item that was previously capitalized. Assuming everything else remains constant, what will be the probable impact on net income in the year of change?
A) Net income increases
B) Net income decreases
C) No effect on net income
D) Assets increase
B) Net income decreases-When one expenses an item, it reduces income in the present period, unlike capitalizing it which would spread the expense into future periods.
Relevance to US CPA Syllabus
The FAR section of the CPA Exam revolves around one main topic: reporting on the company’s financial position. It covers U.S. GAAP, preparation of the financial statements, recognition and measurement of accounting transactions, and disclosure for a wide range of businesses. Understanding financial reporting helps candidates to properly generate, audit and interpret financial statements. It is an essential skill for any CPA.
Financial Reporting US CPA Questions
Q1: What is the first step of the revenue recognition model in ASC 606?
A. Allocate the transaction price
B. Recognize revenue
C. Identify the contract with a customer
D. Determine the transaction price
Answer: C. Identify the contract with a customer
Q 2: All of the following are part of the other person comprehensive income of an entity EXCEPT
A. Gains on available-for-sale securities that have not been realized
B. Translation adjustments, cumulative
C. Dividends declared
D. Net income
Answer: C. Dividends declared
Q 3: Under U.S. GAAP, which of the following items would be classified as financing in the statement of cash flows?
A. Purchase of equipment
B. Interest on debt payments
C. Effect of common stock issuance
D. Payment of income taxes
Answer: C Effect of common stock issuance
Q 4 : _ is one trait of a finance lease for the lessee under ASC 842.
A. The question states that the lease is for less than 12 months
B. The asset is returned to the lessor at end of term
C. The property becomes the property of the lessee after the lease ends
D. Lease payments are all considered rent expense
Answer: C At the end of the lease, ownership of the asset is transferred to the lessee.
Q 5: Inventory Valuation
A: U.S. GAAP measures inventory at:
A. The higher of blot or cost
B. Cost or net realizable values
C. Replacement cost
D. Present value of future expected cash flows
Answer: B. Lower of cost or net realizable value
