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What Is Financial Reporting? - Purpose, Statement Examples & Analysis

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  • 0:00 Financial Reporting Defined
  • 0:35 Purpose
  • 1:21 Financial Statements…
  • 3:34 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
Financial reporting is a vital part of corporate governance. In this lesson, you'll learn what financial reporting is, its primary components, its purpose, and be provided with some examples. A short quiz follows the lesson.

Financial Reporting Defined

Financial reporting involves the disclosure of financial information to management and the public (if the company is publicly traded) about how the company is performing over a specific period of time. Financial reports are usually issued on a quarterly and annual basis. This is different from management reporting, which is financial information that is disclosed to those inside the company to be used to make decisions within the company. Financial reports are included in a public company's annual report.

Purpose

Financial reporting serves two primary purposes. First, it helps management to engage in effective decision-making concerning the company's objectives and overall strategies. The data disclosed in the reports can help management discern the strengths and weaknesses of the company, as well as its overall financial health. Second, financial reporting provides vital information about the financial health and activities of the company to its stakeholders including its shareholders, potential investors, consumers, and government regulators. It's a means of ensuring that the company is being run appropriately. You should note that if a company is publicly traded, it is subject to some very strict reporting regulations enforced by the Securities and Exchange Commission (SEC).

Financial Statements and Analysis

Let's take a look at the primary financial statements used in financial reporting and what each will tell you about the company.

A balance sheet is a snapshot of what the company owns and how it financed what it owns, through borrowing or through the company owners' investments. Now, let's look at it in a more technical sense. A balance sheet is based on the standard accounting model: Assets = Liabilities + Equity. The balance sheet breaks down these components and reports the company's assets, liabilities, and equity.

Assets are the things that a company owns or is owed, including cash. Liabilities are what the company owes to other companies or to individuals. Equity is the amount that the owners (including shareholders, if applicable) have invested, plus retained earnings or losses; these are the earnings (or losses) that have accumulated since the company was started that were not paid out as dividends, which means they were reinvested into the company.

Also known as a profit and loss statement (P&L), an income statement reports on the company's earnings over the reporting period. It will tell you the amount of revenue the company generated, what it cost to earn that revenue, and the general expenses incurred to operate the business. If revenue is greater than expenses, then the income statement will reflect a net profit for the reporting period. If expenses exceeded revenue, then the company suffered a net loss for the period.

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