Importance of Financial Reporting

• Reading Time: 3 Minutes
• Published: August 28, 2020
• Last Updated: January 23, 2025

In a perfect business world, the term financial reporting has significant relevance and considered an important obligation to be performed by the company. The stakeholders of the company, like the investors, creditors, government, tax authorities, and board members rely entirely on the financial statements reported to them. The principles of financial reporting US make it mandatory for companies to disclose their financial performance for the stakeholders of the company. We all realize that financial reporting is crucial for a business, but do we know how it is crucial? The following content aims to explain the untapped powers and potential of financial reporting.

What is Financial Reporting?

It is a standard practice carried on by the companies where they represent accurate information about the finances of the company. In other words, it is a formal record where the company gives a detailed insight into its financial information like capital, revenues, expenses, profits and cash flows, etc. It is vital as it indicates the overall financial health of the business.

The purpose of financial reporting is to give all the necessary information about the company to the stakeholders so that they can make crucial decisions about the company.

Importance of Financial Reporting

The following are the reasons which explain why financial reporting is crucial.

Tax Purposes

Financial analysis and reporting are crucial and mandatory by law for rendering tax purposes. The government requires financial reporting to make sure that the company is paying an accurate share of taxes. This gave birth to the audit companies whose tasks are to review the financial reports rendered by the company.

For the decision making of the shareholders

The stakeholders of the companies like the investors, creditors, etc. are always interested in financial reporting as it affects their decisions about the company. Based on the performance of the company, the lenders will decide whether to lend money to the company, and investors will decide if it is valuable to invest in the company. So full disclosure about financial statements is important as it affects all the stakeholders in different ways.

For the decision of internal management

Well, financial reports are not enough for the internal management for internal decision making, but to some extent, it can serve as the foundation for the other reports of the company. The financial reports accurately made and analyzed can serve many decisions of the company in various possible ways.

For capital raising and audits

Financial reporting is important because it gives confidence to the investors to invest in the company if the statements are sound. So, it helps in accurately raising funds from the public. The statutory auditors also audit the financial statements reported by the company. They further give their opinions about the same.

These are some of the points that explain why financial reporting services are crucial. Financial reporting reaps many benefits to the company as it improves the debt management, management of liabilities, and also helps in improving its efficiency.

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