Question

In recent years the financial reporting function has come under challenge with
many arguing that the major financial reports do not contain some of the key
information that users require in order to make more informed decisions about a
business. Discuss the above statement. Your answer could include a critical
evaluation of the form and content of current financial reports and consideration
of any additional information that could be included in financial reports to
enhance decision making.

Answer 1

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.

But financial reporting lacks of some important information regarding financial reports

Unfortunately, financial statements standing alone may not reveal everything and tell the whole story.  Here are a number of those elements of your business that your financial statements may not tell you.

1.    Will the business continue to operate into the future as well or poorly as in the past? Related to those uncertainties is the question of whether the business has adequate working capital to continue during the ups and downs of their business cycle. The financial metrics that may be determined from the face of the financial statement at a point in time, may not reveal significant changes that could be made in products or services sold that could result in greatly improved earnings of the business.

2.    Has fraudulent activity occurred within the business? Irregularities in management decisions that deliberately (or inadvertently) distort the numbers are not always reflective on the face of financials statements. To discover fraudulent activities, often a concerted effort is needed to look at business practices and procedures, including benchmarks, routines, disbursements and bank activity.

3.    Can the business be compared to peers with only financial statements as a reference tool?  Companies may have different accounting policies and methods for similar types of assets, i.e. one company records inventory on the first-in, first-out method, while the second company uses the average cost method. Another difference may be the cost structure such as the employee mix or technology utilization.

4.    The market value of the business assets is not presented. The balance sheet is primarily recorded at the historical cost of assets, such as property and equipment, Often intangible assets are not reflected as assets on the balance sheet. For example, the expenditures to build the brand or expand a product or service offering are generally charged to expenses instead of an asset, resulting in an understating of the value of the assets.  

5.    Non-financial factors surrounding the business.  Examples may include environmental factors that impact either revenue sources or raw materials, or market demand that may impact the perception of the products or services offered. Other factors to consider are regulatory matters, competition, or changes in key customers or performance not noted until it’s too late. These factors require early and deliberate consideration of the financial and budgetary impact

These factors are no included in financial reports hence they influence the decision of the external as well as internal parties