Why is Financial Reporting Important?

Sept 01,2022

Financial reporting is the process of gathering a business’s financial statements to produce and publish a report that depicts the company’s overall financial position. All companies across Canada must create and publish periodic financial reports, making these documents an essential part of running a business.
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What Is The Purpose Of Financial Reporting?

A business’s financial reports serve the function of transparency and accountability within the market industry. Companies across Canada are required by law to record all transactions of their business, using this information to create financial statements. These statements are compiled into a financial report, which is then published online for public dissemination.

These reports provide a snapshot of the business’s financial position, illustrating how well they are doing within their daily operations. The purpose of financial reporting is to supply this snapshot to internal and external entities- such as the Canada Revenue Agency and investors, stakeholders, and creditors.

Therefore, a financial report of a company should be able to answer all of these questions:

  • Is the business making a profit or losing money?
  • What are the business’s assets, and how do they compare to their liabilities?
  • What is the business’s working capital, and do they have a positive or negative cash flow?
  • Did the business reinvest the profits it made?
  • Is there a potential for growth in the company? Do they have the capital to expand?

Your small business must publish these records publicly, so others can check that you are following all regulations and that your business is running successfully. By publishing the financial statement and reports, you allow others of importance to view this information, including:

  • Internal management
  • Stakeholders
  • Partners in ownership
  • Potential investors
  • Creditors
  • Industry-specific organizations
  • Governmental bodies

Why are financial statements important

A business’s financial statements illustrate the actual status of the company’s financial performance in a given period. These statements – the income statement, balance sheet, cash flow statement, and statement of retained earnings- are all documents created from the business’s accounting records in question.

Companies across Canada must record all transactions surrounding a business, using the International Financial Reporting Standards, or IFRS for short. This independent organization created a set of guidelines all companies must adhere to when compiling their reports. These guidelines help businesses accurately track and record all money entering and exiting the business in a uniform manner.

Others can use these statements to determine how well the business performs while ensuring they are following all laws and requirements. These are the primary uses of financial statements compiled into your business’s records.

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