Definition of Financial Reports and Their Importance

Definition

Financial reports are a comprehensive set of organized statements and accounting data that present the financial position, business results, and cash flows of a company during a specific period. They include the balance sheet, income statement, cash flow statement, and statement of changes in equity, in addition to supplementary notes and explanatory management reports. These reports are prepared according to approved accounting standards and undergo independent auditing to ensure accuracy and reliability.

Importance

The importance of financial reports lies in being the primary means of communication between companies and various stakeholders. They help investors and creditors make informed decisions about investment and lending, providing necessary transparency to understand the company's true financial performance. They enable monitoring management performance and evaluating its efficiency in using available resources. From a legal perspective, these reports meet regulatory and legal requirements imposed on companies and support financial and strategic planning processes for institutions across all sectors.

Types and Characteristics of Financial Reports

Types:

• Balance Sheet: Shows financial position at a specific date including assets, liabilities, and equity
• Income Statement: Displays revenues, expenses, and net profits or losses during a specific period
• Cash Flow Statement: Tracks cash movement from operating, investing, and financing activities
• Statement of Changes in Equity: Shows changes in capital, retained earnings, and reserves
• Quarterly Reports: Brief quarterly results for monitoring periodic performance and financial developments
• Annual Reports: Comprehensive reports including management analysis, future expectations, and company strategy

Characteristics:

• Reliability: Accurate information free from material errors and verifiable from independent sources
• Relevance: Provides useful and influential information for investment and credit decisions
• Comparability: Ability to compare performance across time periods and between different companies
• Clarity: Understandable and readable for users at various professional and academic levels
• Timeliness: Available at legally specified deadlines before their usefulness expires for decision-making
• Completeness: Includes all material information and necessary disclosures without significant omission

Difference Between Financial Reports and Financial Statements

Financial statements refer specifically to basic and standardized accounting data including the balance sheet, income statement, cash flow statement, and statement of changes in equity. These statements are prepared according to specific accounting standards and follow a unified and standardized format in presentation and classification.

Financial reports are a broader and more comprehensive concept that includes basic financial statements plus supplementary notes, management report, external auditor's report, and additional analyses and interpretations. Financial reports aim to provide an integrated and detailed picture of the company's financial performance and position.

The fundamental difference is that financial statements show raw financial figures and data in an organized manner, while financial reports interpret and analyze these figures and clarify the context and surrounding circumstances, making them more useful for financial information users in making their decisions.

Steps for Preparing Financial Reports

Preparing financial reports follows specific methodical steps to ensure accuracy and reliability, including the following stages:

• Data Collection: Gathering all accounting records, financial documents, contracts, and invoices from all departments
• Verification and Review: Ensuring data accuracy and completeness and matching with original documents and resolving any discrepancies
• Classification and Categorization: Organizing data by nature (assets, liabilities, revenues, expenses) according to accounting standards
• Preparing Basic Statements: Preparing balance sheet, income statement, cash flow statement, and equity statement
• Writing Notes: Adding detailed explanations, accounting policies, contingent liabilities, and subsequent events
• Financial Analysis: Calculating key financial ratios, trend analysis, and comparison with previous periods
• Preparing Management Report: Writing detailed explanation of performance, developments, challenges, and future expectations
• Final Review: Comprehensive examination for accuracy and completeness and ensuring compliance with standards and laws
• Signing and Approval: Obtaining approval from executive management, board of directors, and external auditor
• Publication and Distribution: Sending report to regulatory bodies and shareholders and publishing to all stakeholders

How to Read and Analyze Financial Reports

Reading and analyzing financial reports is an essential skill for any investor, financial analyst, or economic decision-maker, requiring deep understanding of accounting and financial concepts and applying systematic methodology to reach correct conclusions about the company's financial performance and position. The process begins with examining information credibility through the auditor's report, then moves to analyzing basic financial statements using various analytical tools such as financial ratios and temporal and sectoral comparisons.

Reading Steps:

• Auditor's Report: Check opinion type (clean means fair statements, qualified indicates specific problems, adverse means unfair statements, disclaimer due to insufficient evidence)
• Executive Summary: Review key results, achievements, challenges, future expectations, and company strategy
• Basic Statements: Review balance sheet to understand financial position, income statement to assess profitability, cash flows to understand liquidity, and equity to understand changes
• Notes: Understand applied accounting policies, important estimates, contingent liabilities, and subsequent events

Financial Analysis:

• Liquidity Ratios: Current ratio (current assets/current liabilities), quick ratio to measure immediate payment ability
• Profitability Ratios: Gross, operating, and net profit margins, return on assets (ROA), return on equity (ROE)
• Leverage Ratios: Debt-to-assets ratio, debt-to-equity ratio, interest coverage ratio to measure debt servicing ability
• Activity Ratios: Inventory turnover, receivables turnover, asset turnover to measure resource utilization efficiency

Vital Indicators:

• Revenue and Profit Growth compared to previous years and trend and cause analysis
• Operating Cash Flow Quality and comparison with net profit to assess earnings quality
• Financial Sustainability through analyzing ability to grow and invest without excessive borrowing
• Comparison with Industry Averages and direct competitors to determine competitive position