Question

KNOW MAIN TYPES OF 3 FINANCIAL STATEMENTS (AND INFO CONTAINED WITHIN THOSE STATEMENTS) AND DIFFERENCE BETWEEN FINANCIAL STATEMENTS AND MANAGEMENT (FINANCIAL) REPORTS

Answer 1

Solution:-

TYPES OF 3 FINANCIAL STATEMENTS (AND INFO CONTAINED WITHIN THOSE STATEMENTS):-

“The three financial statements are the income statement, balance sheet, and statement of cash flows.

The income statement is a statement that illustrates the profitability of the company. It begins with the revenue line and after subtracting various expenses arrives at net income. The income statement covers a specified period like quarter or year.

Unlike the income statement, the balance sheet does not account for the entire period and rather is a snapshot of the company at a specific point in time such as the end of the quarter or year. The balance sheet shows the company’s resources (assets) and funding for those resources (liabilities and stockholder’s equity). Assets must always equal the sum of liabilities and equity.

Lastly, the statement of cash flows is a magnification of the cash account on the balance sheet and accounts for the entire period reconciling the beginning of period to end of period cash balance. It typically begins with net income and is then adjusted for various non-cash expenses and non-cash income to arrive at cash from operating. Cash from investing and financing are then added to cash flow from operations to arrive at net change in cash for the year.”

DIFFERENCE BETWEEN FINANCIAL STATEMENTS AND MANAGEMENT (FINANCIAL) REPORTS:-

Both financial reporting and management reporting play an important role in public as well as privately held companies.

Differences in Audiences, Content, and Frequency:-

Financial reporting is focused on the disclosure of financial results and related information to internal and external stakeholders about how a company is performing over a specific period of time. Financial reports are usually issued on a quarterly and annual basis.

Management reporting, on the other hand, includes financial and operational information that is disclosed only to internal management to be used to make decisions within the company. Management reporting is typically done monthly or more frequently, depending on the industry and organization.

Differences in Guidelines and Formats

Financial reporting is performed according to generally accepted accounting standards, such as US GAAP. The typical financial statements for a business include the balance sheet, income statement, statement of changes in equity, and cash flow statement.   

Conversely, management reporting is not required to be performed in accordance with accounting guidelines and can include a variety of reports and delivery mechanisms. This may include the following:

• Divisional or product-line profit and loss statements
• Cost center manager reports
• Actual vs. budget variance reports
• Product or customer profitability reports
• KPI reporting
• Management dashboards and scorecards

How Both Types of Reporting Help Improve Performance:-

Both private and publicly held corporations typically prepare a package of information for their boards of directors meetings. These “board books” include financial statements and other operational information about the business. This additional information can be in the form of charts, graphs, tables, and textual commentary.

All of this information is designed to help managers, executives, and board members make decisions that impact the future performance of the organization. This can include mergers and acquisitions, hiring, allocating resources, investing in new ventures, or downsizing and divesting businesses as needed.