What is an accurate financial statement?

How important are accurate financial statements for companies? The value for people who own and operate the company can be over-stated. There are various types of financial statements that are critical for any company/organization including:

• Balance Sheet
• Cash Flow Statement
• Income Statement
• Statement of Comprehensive Income
• Statement of Stockholder’s Equity

The figures in such financial statements play a big part in planning strategies, making decisions, estimating failures, determining success, and getting the word out about a company.

Accuracy of Companies’ Financial Statements

It’s important for the financial statements of companies to be as accurate as possible. This might seem like a case of stating the obvious but there are several reasons why this is important including the following reasons:

It’s important to catch errors in financial statements. This can help to avoid possible issues like being engaging in any wrongdoing. In the case that illegal activity is happening it can be caught when there are discrepancies in a company’s figures.

This explains why companies spend a lot of time and money reconciling their accounts and verifying each entry. This helps to check if any tampering has taken place. It can also help to check if any accounting mistake has been made. Both are things your company will definitely want to find and fix in order to avoid a lot of issues.

During recent years investment banking, in particular, has resulted in many accounting issues in order to cover big losses in trading. The losses were hidden due to financial reporting systems being inefficient. This explains why regulators now ask financial institutions like banks to focus more on the methods they use for internal accounting.

There’s no question that corporate tax rates are sky-high. When companies earn big profits, they must also pay high taxes. In fact, companies are often surprised after figuring out the small net income they have after paying taxes to local and national governments.

How about the process of lowering the tax burden? It’s possible but it’s also important to have very exact financial numbers. However, if that didn’t happen the resources might be depleted quickly. On the other hand, accurate financial statements are critical for the government. That’s because several companies tweak their reports in an attempt to avoid paying their fair share of taxes. So it’s critical for companies to maintain and report accurate tax figures to avoid any related problems.

It’s important to build trust with investors. They want to see that the company is succeeding so they feel comfortable about investing in the company. Is it enough for the company’s balance sheets showing a profit? It’s a state but there are times when a company’s balance sheet actually shows a profit but later it’s discovered the company was actually in the red.

There are even cases when large companies and accounting companies shutter because they’ve fudged financial statements. After such reports, it shouldn’t be surprising that today the public is more concerned about companies filing accurate financial statements. In fact, governments are also requiring stricter accounting compliance. This is critical to help prevent companies from reporting fake financial numbers.

When companies make decisions it’s important to evaluate financial statements. Here’s how it works. A company’s finance manager reviews the value of assets that he holds. He then decides if the company can afford to make more purchases. After the value of assets is greatly depreciated there are questions about if they should be sold.

Companies require more funds in order to expand their business. Accountants look at the balance sheets debts, other loans, and shareholders capital to figure out the kind of financing the company can afford. When the company must pay divided the company’s CFO reviews made profits, debts to be paid, and provisions for different reserves. They then decide what the amount of the divided can be.

Companies can make better decisions and be planning when they have accurate financial statements. Different statements like fund flow, working capital, and cash flow must be reviewed daily. This is done to evaluate the amount of money a company is making, the amount that’s needed reserves to be saved, etc. the company can then determine the steps it should take in order to boo sales and financing.

Today it’s more important than ever for companies to practice transparency including financial transparency. It’s even small numbers on a company’s balance sheet can have a big effect on the company. When assets are purchased their value usually decreases. A certain percentage of the item’s value decreases due to the process of depreciation.

A company might report a particular number as the revenue it’s earned. However, it’s important to accurately state the amount that’s actual cash and the value that account receivable. There are several important figures that provide a lot of information to managers and shareholders. They include Profit before/after tax, profit after interest, tax, and appreciation. It’s important to know what these figures are about since they have a major effect on your company.

Financial statements’ accuracy is critical in order to optimize the Accounts Payable/Receivable cycles. Various other outgoing payments include daily wages/salaries that must be paid, inventory management Accounting, dividends to shareholders, and creditors paid. These actions are possible when a company’s financial numbers are accurate. In the case, loans are overdue a company must know the amount of interest that must be paid/received. Calculations can only be done when the correct figures are available.

The bottom line is it’s important for a company to maintain accurate financial statements. This can help to avoid a lot of potential problems. The reasons mentioned above are just some of the many reasons why this is critical for all companies. There are various accounting standards companies should follow in order to generate the accounting statements. IT’s a key factor in making sure finance/accounting departments show accurate figures to management and stakeholders. Taking this action can help to avoid a lot of potential problems including ones that affect the company’s profits and other factors.

• Accounting reports show the financial health of your business.
• Cash flow statements, profit and loss statements, and balance sheets are among the most popular types of accounting reports.
• Accounting reports are used by company leaders, as well as outside accountants, lenders and insurance providers.
• This article is for business owners who want to learn more about what accounting reports are and what they used for.

To understand the financial status of your business, it is critical that you keep accurate records. Having solid, easy-to-understand accounting reports when you need them is a good step toward ensuring you always know the current financial state of your business. The best accounting software generates dozens of reports, so it is important to know which ones you should be paying close attention to.

What are accounting reports?

Accounting reports are statements that show the financial health of a business. Some reports show the results of a company’s operations over time; others reveal a snapshot of a company’s financial condition at a particular moment.

Common examples of accounting reports include balance sheets, profit and loss statements, statements of free cash flow, and statements of owner equity. There are also consolidated earnings statements (for companies that have multiple departments or divisions), as well as more specialized reports, like accounts receivable aging. But all of these reports have the same goal: to reflect the current financial state of a business.

These accounting reports are prepared regularly by a company’s senior management to guide company strategy and facilitate decision-making. Reports prepared according to generally accepted accounting standards can also be used to present to shareholders, lenders or insurers for various purposes.

These reports are not normally used in tax filings, but when used appropriately, they can certainly help small business owners understand their potential tax liability at any particular point in time.

Why accounting reports are important

For most of use, when we think of accounting reports, we immediately think of taxes. And, sure, taxes are always a consideration when reviewing a company’s financials. But these reports are much more impactful and much more commonly used for other purposes. Most notably, these reports are used by management within a company to get insight into what’s happening in the various segments of a business and make decisions about its operation – how to generate revenue and grow profits.

Some other situations where accounting reports are especially significant include:

For larger companies, accounting reports are also important for presenting the company’s financial condition to shareholders, so they know what’s happening within the company. These reports provide key insights into the financial status of a company and the results of its recent operations.

Types of accounting reports

There are many different types of accounting reports that are used to reflect various aspects of a company’s financial status. However, there are four or five core types of accounting reports that are used by most small businesses. All of these are available from most small business accounting software packages.

• Balance sheet: A company’s balance sheet is a snapshot at a particular point in time of its assets, liabilities and shareholder equity. The statement is essentially a list of the assets, debts and net value of the company, each broken out by category (long-term vs. short-term debts, for example).

• Statement of profit and loss (P&L): A P&L statement shows a company’s income and expenses by category over a set period of time. It’s used for showing the strongest and weakest areas of a business, and is also used to compare a company’s recent performance to the same period in previous years to measure change.

• Statement of free cash flow: This report shows how much cash is available to pay creditors or pay dividends to investors. To determine that amount, you take the total sales revenue and subtract your costs and operating expenses. This statement helps the company manage cash flow that isn’t required to continue operating the business.

• Statement of shareholder equity: A statement of owner’s equity breaks down the net book value of a company into various categories to show shareholders exactly how much their investment is worth on paper (if the company were to be liquidated).

In addition to these core reports, there are many others, and many more permutations of each, adjusted to meet the circumstances of individual businesses and the preferences of their owners and managers.

Lots of executives create custom reports as well. These versions may focus on the areas of the business that management wants to track most closely, or compare recent results with those from the same time period last year.

How do you prepare an accounting report?

The process of preparing an accounting report generally depends on the report, the size and scope of the business, the amount of detail you want to include in the report, and the time periods being compared. Generally, the process involves totaling certain accounts for a set period of time.

Modern accounting software can generate most accounting reports automatically, so the process for creating them varies only based on the accounting software you use. Here are some popular reports and what they entail.

• Balance sheet: Add up the value of all company assets (cash and cash equivalents, inventory, equipment, property, etc.) and subtract all liabilities (outstanding loans, unpaid bills). Break down what remains (shareholder equity) into appropriate categories (shareholder equity, goodwill, etc.).

• P&L: Aggregate revenue by category over the preceding month, quarter, year, etc. (whatever range you want), and then deduct expenses (by category) over the same time frame.

• Statement of shareholder equity: Calculate total equity (measured by the difference between total assets and total liabilities), then break out the total into relevant accounts – contributed capital, net income, retained earnings, dividends, and so on.

This process can be repeated for other reports you wish to generate. What’s more, most accounting software usually offers the option to customize reports – to select dates and to decide which accounts to include/exclude –to generate the most insightful reports for company management.

How accounting reports are used

Accounting reports are predominantly used by a business’s senior managers to assess financial situations and measure results. Even more importantly, the insights gleaned from various reports are used to make decisions about a company’s general strategy.

For example, a P&L statement can be used to compare operating results with previous periods to see which parts of a business are growing or shrinking. A balance sheet shows how liquid a company is – how much cash is available for investment in expanding business. Reviewing these statements can help managers determine where and how to invest company resources to cut costs and maximize revenue.

Managers aren’t the only ones looking at accounting reports. Here are a few examples of who else looks at financial statements and why.

• Accountants: A company’s accountants may review reports to decide whether certain tax strategies may be advantageous, or when valuing a business for a potential sale. Sometimes these reports may be required by regulators, depending on what industry a business operates in.

• Lenders: Banks and other lenders assess a company’s financial condition to decide whether it qualifies for a loan. Banks have their own forms and reports that need to be completed as part of a loan application, but company accounting reports can provide a preliminary indication of whether a business may qualify.

• Insurers: Insurers can look at company financials to determine what types of insurance a business may need and how much coverage may be required to provide it adequate protection.

• Shareholders: Current and prospective investors often review company accounting reports to assess the value of the company and its future prospects. These reports can be extremely thorough but are also often condensed.

These are a few of the hypothetical situations that illustrate why it’s important to be able to customize financial reports ‒ they help you provide better insights for the shareholders, lenders, accountants, and others who may review them.

Accounting software reports

Thankfully, accounting reports of all types can be easily generated using most off-the-shelf accounting software packages, and these reports can be updated continuously to provide up-to-the-minute (though unaudited) insights on what is happening in your business and the financial standing of the company.

If you’re going to invest in accounting software to help track your company’s finances, you should be sure it is capable of generating these reports easily. Some common options you should check for include:

• The ability to adjust time frames and compare results to the same period in previous years
• The option to specifically include or exclude individual accounts or line items
• The ability to add notes explaining atypical results in particular accounts or categories
• A way to create your own custom reports on your own template that shows the information that is the most important to you

These features will give you tremendous flexibility to dissect your company’s financials and make the most informed decisions about the management of your small business.