What Are Accounting Reports?
A business uses their accounting records to compile financial reports called Accounting Reports. Reports can be as brief or comprehensive as needed for custom-made reports intended for specific purposes such as profitability of a product line or sales by region. Accounting reports are equivalent financial statements.
The most common accounting reports are:
Income statements: shows the revenues earned during a period, minus the expenses, to arrive at a profit or loss. Since this judges the performance of a business, this is the most commonly used accounting report.
Statement of cash flows: details the sources and uses of cash related to operations, financing, and investments. It is the most accurate source of information regarding a business’ ability to generate cash.
Balance sheet: shows the ending asset, liability and equity balances as of the balance sheet date. This report is used to judge the liquidity and financial reserves of a business.
Accounting reports might be accompanied by various footnotes that are most likely to be reviewed in the case of the financial statement being audited.
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What Is Included in Financial Reporting?
Financial reports should be comparable to those of other companies, especially ones within the same industry. Reports need to meet certain requirements, so they need to be prepared in accordance with the Generally Accepted Accounting Principles (known as the GAAP) which “encompasses the conventions, rules and procedures, necessary to define accepted accounting practice at a particular time.”
Financial reporting should include:
- external financial statements (income statement, statement of comprehensive income, balance sheet, statement of cash flows and statement of stockholders’ equity)
- notes to the financial statements
- public documentation regarding quarterly earnings and related information
- quarterly and annual reports to stockholders
- financial information posted on a corporation’s website
- financial reports to governmental agencies including quarterly and annual reports to the
- Securities and Exchange Commission (SEC)
- documentation pertaining to the distribution of common stock and other securities
What Are the Monthly Financial Reports?
Monthly reporting can give you a current view of the financial state of your business. It is important for business owners to analyze their financial data regularly so that they can effectively run their company, make more informed business decisions and enable better operational practices.
Here are three of the most essential accounting reports business should be reviewed on regular basis.
A balance sheet is a financial statement that outlines a business’ total assets, liabilities and stockholder equity for a specific period of time. It provides a current view of a business’ financial position, including economic resources the company owns, owes and the sources of financing for those resources.
Balance Sheets can be used to identify trends and help business owners to make informed financial decisions. It is also important to potential investors and bank lenders, as they will use it to determine if the risk to lend credit is worth it.
The income statement also called the Profit and Loss Statement summarizes the totally revenues and expenses incurred by a business and shows the profitability (net income or net loss) during a specified period of time.
This report is used by internal and external stakeholders to evaluate a company’s profitability and helps assess the level of risk of an investor or creditor. For a company to be viable, revenues must exceed expenses.
Cash Flow Statement
The summary of all cash inflows and outflows of a business over a period of time is called a Cash Flow Statement. It differs from an Income Statement because it only takes into account cash activity and doesn’t consider non-cash activities like sales or purchases on credit or depreciation.
Cash Flow Statements are presented with three sections: operating, financing and investing activities and identifies which areas of the business are generating and using the most amount of cash. The best use of the cash flow statement is to estimate future cash flows which will help with budgeting and inform future business decisions.
A standard financial statement package consists of the cash flow statement, balance sheet and income statement together. These reports should be prepared by an accounting team on a monthly basis after all month-end procedures have been performed. They should be used to calculate key performance indicators and to regularly monitor financial activity.
How Are the Accounting Reports Prepared?
Financial statements help businesses determine their financial position at a specific point in time and over a period of time. Data from your accounting journal and general ledger is used to prepare income statements, balance sheets and statements of cash flows. Information from previous reports is used to develop the next.
Preparing an Income Statement
The income statement shows the overall profitability of a company during a specific period of time. Data from accounting journals and the general ledger are used to prepare an income statement. The statement details primary sources of income such as sales of the company’s products and services. It also shows secondary sources of income like if a company sublets a portion of its premises. Income statements outline any revenue during a time period in question from assets, such as obtaining sales equipment or interest income.
Business expenses are also shown on an income statement. Primary expenses, expenses from secondary activities and losses from activity, including depreciation, are detailed on the statement. It should be noted that depreciation is only shown for the specific time period being reported and not the total depreciation of an item in its useful lifecycle.
Preparing a Balance Sheet
A company’s financial position at the end of an accounting cycle is illustrated on the balance sheet. A company’s assets and liabilities and equity should be detailed on a balance sheet. Assets must equal liabilities plus equity or owner’s investment. Liabilities and equity are used to purchase assets. The balance sheet shows your company’s financial position with regard to assets and liabilities and equity at a set point in time.
Data on a balance sheet come from the general ledger, and the format mirrors the accounting equation used in the general ledger. Assets, liabilities and owners’ equity on the last day of the accounting cycle are recorded on a balance sheet.
Depreciation on a balance sheet differs from depreciation shown on the income statement. On a balance sheet, it is the total accumulated depreciation from the day the item was acquired to the present.
Preparing a Statement of Cash Flows
Statements of cash flows help a business see if they have adequate cash flow to operate.
This statement compares two time periods of financial data and shows how cash has changed in the revenue, expense, asset, liability and equity accounts during these time periods.
Statements of cash flows must be prepared last because it takes information from previously prepared financial statements. It divides the cash flows into operating cash flows, investment cash flows, and financing cash flows. The result is the net change in cash flows for a particular time period and gives the business a very comprehensive view of the cash position.
Statement of cash flows shows a company’s financial position on a cash basis rather than an accrual basis. This a record of the revenue actually received from a company’s customers in most cases.
What Is the Purpose of Financial Reporting?
The purpose of financial statements is to provide a business information about operations, financial positioning and cash flows. This information is used to make financial decisions regarding the allocation of resources. Specific statements are used for specific business purposes.
Financial statements can be used for many purposes including:
Credit decisions: information is used by lenders to determine if they should extend credit to a business or restrict the amount of credit extended.
Investment decisions: investors analyze statements to decide whether to invest and what price per share at which they want to invest. The information is used to develop a potential selling price for the company.
Taxation decisions: a business may be taxed based on its assets or income and that amount can be derived by the government using information from financial statements.
Union bargaining decisions: financial statements can be used by a union to base its bargaining position based on a company’s ability to pay.
These are just a few purposes of financial statements. A financial statement can be used for a number of purposes depending on what information is needed.