Why Is Financial Reporting Important?

Thomas Barwick/Stone/Getty Images

Financial reporting is important because it helps to ensure that companies and organizations comply with relevant regulations and, if it is a public company, shows investors the current financial health of a company. Investors use need this data to make investment decisions, voice concerns and vote on issues at shareholder meetings.

The volume of financial reporting to regulatory agencies varies considerably depending on an organization’s size and industry. Typically, these reports are not particularly interesting for investors, unless regulators identify a problem. Instead, most investors are concerned with the financial statements public companies must publish each quarter and at the end of the fiscal year. The reports must include four sections: the balance sheet, income statement, cash flow statement and management’s discussion and analysis. According to McGraw-Hill Higher Education, the balance sheet shows investors that there are no fundamental flaws in the operations of the company and lists the total equity of shareholders’, which, when judged against previous performance, gives investors a picture of the company’s financial health. The income statement shows income and expenses for a given period. This section is often the most talked about because it lists a company’s profit or loss and earnings per share, which is profit or loss divided by the total number of shares. The cash flow statement, though often scrutinized less than the income statement, is very important because it illustrates changes in a company’s finances over time, according to the U.S. Securities and Exchange Commission. Management’s discussion and analysis provides context for the statistics from top-level managers, as well as trends and risks the company faces.