A financial report provides insight and transparency into a company’s financial position and operations. It’s meant to give stakeholders – from investors to government agencies – the data they need to make better-informed decisions. It also helps businesses stay compliant and build trust with their stakeholders. Poor or fraudulent financial reporting can sink a company’s reputation and value.
The four core financial reports every business needs are the income statement, balance sheet, cash flow statement and statement of owner’s equity. The income statement measures revenue and expenses over a period of time, using accrual accounting to match revenues with invoices and payments. The balance sheet lists assets (e.g., cash and accounts receivable) and liabilities (e.g., loans payable and stockholders’ equity) at a point in time and classifies them as current or noncurrent based on whether they are expected to be converted into cash within one year. The cash flow statement reveals operating, investing and financing activities that affect a company’s liquidity, including a break-even analysis or highlighting cash outflows such as repaying debt or repurchasing stock.
Investors and potential investors rely on financial statements to gauge a business’s profitability, stability and growth prospects. They can then use this information to calculate their risk and estimated return on investment. Likewise, creditors and suppliers review financial reports to assess a company’s creditworthiness when deciding on loan terms and conditions. In addition, a business’s financial reports help it budget and forecast future expenditures by showing where money is coming from and where it’s going. Financial reporting should be clear, relevant, verifiable and comparable to facilitate decision-making, while disclosing a company’s accounting policies and any material risks.