Financial Report is a set of documents of the financial activities of a business, person, or other entity by government agencies at the end of an accounting period.
Financial Report generally contains summary of accounting data for that period, with background notes, forms and other information. It highlights the financial state of any company. It includes the balance sheet, statement of income of the company from which the net profit and loss can be measured. Financial Report features the detailed explanation of financial data which comprises income from all sources and the outlays, assets and liabilities as well. Financial Report renders the financial status or performance of a company.
Levels of Financial Report:
Financial Reports come in three levels:
Audited financial reports are compiled by an independent accounting firm from company records. This is the preferred type of financial report. The audit firm signs off on the financial report when the audit is complete. They typically state that the accounting conforms to generally accepted accounting principles (GAAP). This is referred to as an unqualified and it is what credit managers ideally want to receive.
If the accounting firm disagrees with the way the company handled one or more transactions believing the issue does not conform to GAAP, it will give a qualified report. Companies generally will go to extreme lengths to make sure that their auditors give an unqualified report as many believe a qualified report is a sign of bigger problems. It can also trigger an investigation from parties such as the Securities and Exchange Commission (SEC) which is something virtually every company would like to avoid.
- Reviewed financial reports are what they indicate. The audit firm reviews the numbers put together by the client, but the accountants have not audited the company’s procedures.
- Compiled financial reports are put together on the basis of information provided by the company to the accountant. The accounting firm has no way of determining if the numbers are accurate or if the company has complied with GAAP.
The more current the report, the more reliable the numbers will be to the credit manager using the information to complete a credit evaluation. Typically, the numbers may be as much as 18 months old. Here’s why. The accountants only audit once a year and this is done after the fiscal year-end. Thus, already some of the information is a year out of date. Then the company must complete the audit and prepare the financial reports. This can and usually does take several months. However, new financial reports should be available six to nine months after the end of the fiscal year. If they are not, it could be a sign of financial difficulties.
Interpretation of Financial Reports:
Financial reports deal with umpteen numerical values due to which it’s a bit tough to interpret this. But by calculating ratios the interpretation can be made easier. The usefulness of taking the ratio is to compare not only the past performances with the current one but also with other’s business performance whatever may the figure be. Howbeit, ratios will not be able to give exact answer but they are a useful indicator to show the company’s financial condition.
The gross margin ratio is very useful to depict the profit and loss of the company. By taking the ratio of gross margin and sales revenue the gross margin ratio is calculated. Another useful ratio is the profit ratio which shows the net income. This information is highly confidential to the company and is not allowed to leak outside because it can help the competitor to change their business strategy. Financial report is usually been made after a quarter or the completion of one year.
Types of Financial Reports: