The context and purpose of financial reporting
The Context and Purpose of Financial Reporting
Understanding Financial Reporting
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Financial Reporting involves the disclosure of financial information to the various stakeholders about the financial performance and financial position of the organisation over a specific period of time.
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The individuals or entities who have interest in the company’s financial performance are referred to as stakeholders. This includes employees, managers, investors, suppliers, customers, regulators, and others.
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Financial Reporting is essential to provide information that demonstrates if the company is making a profit or a loss, what is the company’s worth, where the funds are being allocated etc.
Purpose of Financial Reporting
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The primary objective of financial reporting is to provide high-quality financial reporting information concerning economic entities, primarily financial in nature, useful for economic decision making.
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To communicate financial information to stakeholders which helps them in decision making. Stakeholders decide on whether to keep on investing in the company based on the financial health of the company.
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To maintain transparency in financial reporting process. It is achieved through the disclosure of financial statements, annual reports etc.
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To make sure companies adhere to the relevant legislation and standards, like International Financial Reporting Standards (IFRS).
Components of Financial Statements
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Balance Sheet / Statement of Financial Position: Snapshot of what a company owns (assets), owes (liabilities), and the shareholder equity at a specific point in time.
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Income Statement: Shows the company's revenue and expenses over a period of time. It tells whether a company made profit or not during the reporting period.
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Cash Flow Statement: Outlines the inflows and outflows of cash and cash equivalents from various activities like operating, investing and financing activities.
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Statement of Changes in Equity: Also known as the statement of retained earnings, it gives a detailed report on the changes in the company's retained earnings during a period.
Role of Accounting Standards
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Accounting standards aim to provide a uniformity and consistency in the financial statements of a company.
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They safeguard the interest of the users who rely on such financial documents, instilling trust and confidence.
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The Accounting Standards Board issues and updates accounting standards. IFRS and UK GAAP are widely accepted standards.