Evaluating the Effectiveness of Financial Reporting

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The basic financial statements a company produces are not only for internal evaluation, but for the use of external entities like shareholders and creditors. Typically, these external users want to see a company’s balance sheet, income statement, statement of ownership and statement of cash flows.

To meet the requirements and expectations of these external users, it is recommended that financial statements be understandable, relevant, reliable and comparable. But in order to meet these requirements with excellence, one must evaluate the cost of doing so.

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Because it is easy to get into the habitual routine of producing and reporting financial information, management may not take the time to evaluate its actual effectiveness. For example, is the added benefit for the users worth the cost of preparation?

Additionally, consider only reporting the information considered material. In the accounting world, something is deemed material if the knowledge of it would influence a report user’s decision regarding the business. Only reporting material information may help eliminate an excess of information and the waste of time and money in compiling it.

It is also crucial to maintain the same accounting methods consistently year after year to financial statements. This assists users in comparing statements from previous years to adequately access changes in the company’s financial position.

Another addition to financial statements which greatly enhances their value is the notes. Reports of the amounts are not enough to paint an accurate financial picture. Notes to the financial statements are in fact required. Typically, the notes for public corporations are the most thorough and comprehensive.