Corporate financial reporting is the system that builds the economic reports of a company. Corporate financial report not only shows the financial statements of a company but it also aims to highlight the necessary financial data and furthermore shows the application of financial policies.
The three main and basic targets of financial reporting are as follows:
- to provide lenders and investors insights of a company’s financial health
- to helps in determining a company’s cash flow
- to tracks and analyzes your business’ income and reports it concurrently.
Good financial reporting can take your company to new heights, as it shows true financial position of a company. If the accountants work efficiently to highlight company’s weak points, it can be saved from hidden losses.
Corporate financial reporting includes income statement, balance sheet, statement of cash flows and statement of retained earnings and change of equity.
Income Statement or Profit Loss Statement
One of the three important financial statements is income statement. Income statement summarizes a company’s revenues and losses over a specified period of time that could either be the end of every month, every six months or every year, depending on the company’s policies.
Income statements give investors and lenders an estimate about how much a company’s monthly or yearly profits and losses are. Therefore it is also called as profit and loss statement.
It clearly reports a company’s financial performance and consequently gives investors an idea of profitability and future growth of the company that helps them analyze whether or not to invest in it.
Income statement aims at four things: revenue, expenses, gains and losses.
Starting with the details of sales down to computing net income, and earnings per share (EPS), income statement has it all.
Net income= (total revenue+gains) – (total expenses and losses)
Balance sheet gives an overview of a company’s finances at the moment. It’s a financial statement that reports a company’s assets, liabilities and shareholders’ equity during that specific time.
Or you can say it’s a statement that identifies what a company owns and owes, as well as the amount invested by the shareholders. What really matters when someone’s looking to invest into your business is the fact that “Is your current asset subtotal compare to the current liabilities subtotal enough to pay off your short term obligations/debt?
More debt than listed equity in balance sheet is clear single that company may dangerously have high amount of borrowing in the future, therefore it is also known as debt to equity ratio. The former information also helps creditors decide whether lending the additional credit would result in a bad debt.
To make it easier for you to understand, let me define some major terms used above in more detail.
Anything owned by your company that has a dollar value is called an asset. List your asset in cash, or how easily they can be consumed, or turned into cash.
Current asset is anything that you plan to convert into cash eventually within a year or so. Current assets include money in a current account, money in transit, accounts receivable, short term investment, inventory, pre-paid expenses and cash equivalents.
Long term assets are the things you don’t plan to convert into cash within a year. Long term assets include property, machinery and equipment, intangible assets (goodwill, franchise agreement, copyrights, and trademarks) and long term investments.
Liabilities are the things that your business owes to others.
Assets and liabilities are listed in both long and current term. These current liabilities includes payable accounts, wage against hours employees have worked, taxes and loans to be paid in same year.
Whereas non-current or long term liabilities include loans that you don’t have to pay within twelve months and bonds your company has issued.
Equity is the money held by your company. It shows what belongs to the corporate owners. Equity is dropped if the owner draws money out of the company to pay themself or when the corporation issues dividends to the shareholders.
Cash flow Statement
Cash flow statement is a financial statement that summarizes the cash or cash equivalent entering or leaving the company in a specific period of time.
Cash flow determines how well a company generates cash to pay off its debt obligations and fulfil its expenses. This way the statement of cash flow reconciles the income statement and balance sheet, serving along as one of the three core financial statements for any corporate.
Statement of cash flow is of utmost importance to both investors and lenders to determine whether to work with your company or not. Because it certainly indicates how financially stable a company is.
The important elements of cash flow statements include,
- Cash from operating activities
- Cash from investing activities
- Cash from financing activities
Supplemental information (disclosure of exchange of significant items that did not involve cash and reports the amount of taxes paid and the interest paid)
This shows day to day business income and regular expenses in a given period of time such as income from sales and paid receivables. Outflows may include payments to the suppliers, insurance, and company taxes.
Cash flow from investing activities signifies cash generated or spent upon bigger items like purchase or sale of an asset, real estate or equipment.
Cash flow from financing activities is used to finance a business. It is the total amount of funds a company generates in a given period of time. Finance activities include issuance and repayment of equity, issuance and repayment of debt, payment of dividends and capital lease obligations. It shows how a company funds its operations and includes changes in all the accounts of debt and equity.
Statement of Retained Earnings
Retained earnings statement represents the total amount of income your company has generated after dividends are paid to the shareholders. This statement reconciles the beginning and ending retained earnings of a company over a specific period of time.
This statement is further used by analysts to analyze how corporate profits are utilized. Retained earnings are the profits reserved by a company for further investment in future projects if they are already not used in making payment of any debt obligations.