Lecture- 2-3

Overview of Financial Reporting

ACC 108- Financial

Reporting
Dr. ARPIT SIDHU
(Ph.D, UGC-NET, HP-SET, MBA,
MCOM, BCOM, Dip-EComm)
 Learning Outcome
• Introduction to the financial
statement

• Objectives of financial
reporting and differences
between U.S. GAAP and IFRS

• users of financial statements

Lecture Outline
Understand the financial statement

Understand the reasons for

following reporting in organizations

Describe the difference between

GAAP and IFRS and

illustrate the users of financial

statements
 NEWS case law
66% single women do not make own financial
decisions Fact
n h
*Fu teac
n
LXME Survey 2020 91% ildre
ch
About 66 percent single women- do not make
their own financial decisions
28 per cent depend on their fathers
5 per cent depend on their mothers
Married women 69 per cent with the fathers
being replaced by husbands or joint decision
making
Social conditioning here plays an important role
in shaping women's outlook towards financial
planning
 Financial Statements - Map or
Maze?????

Maze –
Attempts to confuse its
user by purposefully
introducing conflicting
elements and
complexities that prevent
reaching the desired goal
Financial Statements - Map or Maze

Map –

Helps its user reach a

desired destination through
clarity of representation
 Financial Statements - Map or Maze
MAP
• Form basis for understanding the
financial position of a firm
• Allow users to assess historical and
prospective financial performance
• Present picture of firm’s financial
health, leading to informed
business decisions
MAZE
• Contain large amounts of
information
• Accounting policies and reporting
requirements are complex and
constantly changing
• Hide or omit key information
 Meaning of Financial Statements
• Financial statements are summaries of the operating, financing, and investment
activities of a firm.

• summarize the past performance of an organization

• provide users with valuable insights into future performance.

• According to the Financial Accounting Standards Board (FASB), the financial

statements of a firm should provide sufficient information that is useful to
• investors and
• creditors
• in making their investment and credit decisions in an informed way.
Financial statements can be analyzed to identify trends in key
financial data, compare financial performance across
companies,
and to calculate financial ratios that can be used to assess a
company’s current performance as well as its prospects for
the future.

A financial analyst is expected to be able to prepare base year

statements to enable trend analysis and review the growth
rates of the various elements of the financial statement.
MCQS
• The financial statements included in the annual report to the
shareholders are least useful to which one of the following?
• a. Stockbrokers.
• b. Bankers preparing to lend money.
• c. Competing businesses.
• d. Managers in charge of operating activities
•D
 Financial Statement
It represent a basic but useful picture of an
entity and are required by the SEC (SEBI) for all
publicly traded companies
1. The income statement, which shows the
results of business activities over a period.
a. Statement of Earnings
b. Statement of Comprehensive
Income (which can be presented
separately or combined with the
Statement of Earnings)
2. The balance sheet, which shows an entity’s
financial position at a point in time
 Financial Statement
3. The statement of cash flows, which shows an
entity’s cash receipts, payments, and the cash
effects of its operating, investing, and
financing activities during the accounting
period.

4. The statement of changes in equity, which

shows owner investments, distribution of
profits to owners, and profits retained by the
company
 MCQS
• What is an investor’s objective in financial statement analysis?
• a) To determine if the firm is risky.
• b) To determine the stability of earnings.
• c) To determine changes necessary to improve future performance.
• d) To determine whether or not an investment is warranted by estimating a
company’s future earnings stream.
•D
 Effective Financial Statement
Analysis
Requires that you:
• Understand the nature of the industry in which the organisation works. This is an
industry factor.
• Understand that the overall state of the economy may also have an impact on the
performance of the organisation.

→ Most entities provide prior year’s financial statement information alongside the
current year’s information to allow analysts to easily compare past performance to
present performance and make a determination of future success.
• Comparison of financial statements highlights the trend of the
_________ of the business.
• Financial position
• Performance
• Profitability
• All of the above
•D
 What Is Financial Reporting?
• Financial reporting refers to standard
practices to give stakeholders an accurate
depiction of a company’s finances,
including their revenues, expenses,
profits, capital, and cash flow, as formal
records that provide in-depth insights
into financial information.

• Financial Reporting is usually considered

an end product of Accounting.
Overview of Financial Reporting
 Financial reporting is the communication of financial information of
an enterprise to the external world.
 It does not means just to communicate information through financial
statements.
 Information like- Unaudited financial results, forecasts, future plans,
etc. are also disclosed
Overview of Financial Reporting
It is defined as:-
• Communication of
• Published Financial Statements & related information
• From business enterprise
• To Users
 It contains both quantitative and qualitative information
Financial reporting
• Each of these financial KPIs* is incredibly important because they
demonstrate the overall ‘health’ of a company – at least when it comes
to the small matter of money.

• These types of KPI reports don’t offer much insight in the way a

company’s culture or management structure, but they are vital to
success, nonetheless.

*next page
• Gross Profit Margin: How much revenue you have left after COGS?
• Operating Profit Margin: How is your EBIT developing over time?
• Operating Expense Ratio: How do you optimize your operating expenses?
• Net Profit Margin: How well your company increases its net profit?
• Working Capital: Is your company in stable financial health?
• Current Ratio: Can you pay your short-term obligations?
• Quick Ratio / Acid Test: Is your company’s liquidity healthy?
• Berry Ratio: Are you losing money or generating profit?
• Cash Conversion Cycle: How fast can you convert resources into cash?
• Accounts Payable Turnover: Are you paying expenses at a reasonable speed?
• Accounts Receivable Turnover: How quickly do you collect payments?
• Vendor Payment Error Rate: Are you processing your invoices productively?
• Budget Variance: Is your budgeting accurate and realistic?
• Return on Assets: Do you utilize your company’s assets efficiently?
• Return on Equity: How much profit do you generate for shareholders?
• Economic Value Added: How much profit do you generate for shareholders?
• Employee Satisfaction: Will your team recommend you as a workplace?
• Payroll Headcount Ratio: How do you utilize your labor force?
 MCQ

How are financial statements related to the objective of financial reporting?

A.Companies use financial statements to document their cash flow, and documenting cash
flow is the objective of financial reporting.

B.Companies use financial statements to determine selling prices of products, and

determining selling prices of products is the objective of financial reporting.

C.Companies use financial statements to determine which new projects to pursue, and
deciding which projects to pursue is the objective of financial reporting.

D.Companies use financial statements to provide financial information to potential capital

providers, and providing information to capital providers is the objective of financial
reporting.
•D
 The typical components of financial
reporting are:
1. The financial statements – Balance Sheet, Profit & loss account, Cash flow
statement & Statement of changes in stock holder’s equity

2. The notes to financial statements

3. Quarterly & Annual reports (in case of listed companies)

4. Prospectus (In case of companies going for IPOs)

5. Management Discussion & Analysis (In case of public companies)

Types of Financial Reporting

Internal Reporting External Reporting

• Financial report made to • Financial report made to
management
stakeholders
Primary objectives of general purpose financial
reporting

• Focus is on the informational needs of external users

• To provide information that is useful to present and potential investors

and creditors and other users in making rational investment, credit, and
similar decisions.

• To provide information about the economic resources of an enterprise,

obligations of the enterprise to transfer resources to other entities.
Objectives of Financial Reporting

• To provide information about an enterprise’s financial performance

during a period.

• To provide information that is useful to managers and directors in

decision making.

• To provide information about operating, investing and financing cash

flows
 Which of the following statements about the primary
purpose of financial reporting is the most correct?

• A Provides information that can help with decision making.

• B The individual needs of users can be satisfied by tailoring of financial reports.

• C Enables accountability since managers would have to account for resources

used.
• D Identifies a range of existing and potential users dependant on financial
statements to make decisions.
A
Thank you