A financial report is a detailed document that provides information about a business’s past performance, present status and future prospects. It covers items such as the company’s assets, liabilities, revenues and expenses. It also contains management’s perspective and analysis. This document is often used by investors, creditors and suppliers to assess a firm’s viability and creditworthiness. It is also required to comply with accounting and regulatory standards set by governing bodies.
A small but rapidly growing strand of empirical research investigates the real effects of financial reporting. These studies show that the quality of a firm’s financial reports influences the decision-usefulness of its reporting for external participants in the input or output market, such as capital suppliers and consumers. In the case of capital markets, for example, studies by Biddle and Hilary (2006) and by Biddle et al. (2009) show that high-quality financial reporting mitigates firms’ financing constraints.
Other studies, such as the ones by Bernard et al. (2017) and Chy and Hope (2021), show that the quality of a firm’s reporting influences the efficiency of its peer firms’ innovation decisions. In particular, the more accurate a firm’s reports, the more efficiently its peers invest in R&D.
Creating a financial report requires gathering all relevant data for the reporting period, including original receipts such as sales invoices and purchase orders. Once collected, these documents should be sorted and matched with corresponding accounting vouchers to determine their accuracy. Then, the beginning and ending accounting balances of each asset, liability, and equity account should be reconciled. After these steps, the financial report is ready for publication.
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