Question

What are the three basic financial statements included in an annual report? Describe the importance of producing high quality financial information for an organization's management and stakeholders.

Answer 1

Three basic financial statements included in an annual report are as follows:

1)Balance Sheet: A Balance Sheet is a statement of the financial position of the business that lists all the assets, liabilities and owners' equity at a particular point of time. The assets and liabilities are mainly classified into fixed and current while the owners' equity broadly comprises of shareholders' funds and reserves & surplus. It shows the entity's net worth.

2)Statement of Profit and Loss: It is a statement summarising the revenues, expenses, and costs incurred during a particular period of time. It is also known as Income Statement. This statement shows the entity's net profit earned over a particular period of time.

3)Cash Flow Statement: The statement of cash flows is an aggregate statement showing the cash inflows and cash outflows of the business. It is divided into three parts- Cash flow from operations, cash flow from investing activities and cash flows from financing activities. The sum of the three cash flows is the net cash inflow (outflow) over a particular period of time.

The importance of producing high-quality financial information for an organization's management and stakeholders is as follows:

Management: Management is a stakeholder internal to the organization. The management is interested in knowing the performance of the firm at a particular time and over a period of time. It has to undertake various decisions regarding the firm's financial planning and analysis, investment and dividend which in turn can influence the share price of the firm. Various metrics regarding the targets of the firm are prepared by the management which can be established with the help of high-quality financial information only which is true and reliable.

Stakeholders: An organization has two categories of stakeholders: External and Internal.
External Stakeholders comprise of suppliers and trade creditors, government, media, consumers and the general public. Management, directors, shareholders, and employees constitute the internal stakeholders of a firm.

Suppliers and Trade Creditors provide the necessary raw materials and short-term credit facilities to the firm. So they are interested in knowing the operation and credit cycle of the firm, the turnover ratios which can be found out with the help of financial statements only. They want to know the performance of the firm to ensure that their money and supplies are safe.

Government authorities require financial statements to calculate the tax liability of the organization. Moreover, they want to know the contribution of the firm on the industry which will help in determining the condition of industries and the economy as a whole.

Media and consumers are interested in knowing the participation of the firms in corporate social activities (CSR). The general public is the main component of society is conscious about the contribution of the firm to the society. A company producing high-quality financial information will be seen as a trustworthy organization and will indirectly improve the image o the firm.

Shareholders are the real owners of the firm. They have invested their funds in the company. So, they are naturally interested in knowing the performance of the firm, whether their interests are being met or not. Highly credible financial information in this way, takes care of the shareholders.

Employees are interested in knowing the composition of the profit to employee costs. They want to know about the remuneration, retirement benefits and other employee benefits. Lastly, they want to know the stability and profitability of their employer.