Financial accounting involves the process of recording, summarizing and reporting the various of business transactions resulting from operations of an organization over a period of time - normally one year. The business transactions are summarized in the preparation of financial statements, including the balance sheet, income statement and cash flow statement that record the company's operating performance over a specified period of time (Phillips, 2011).
Information contained in the financial accounting records are summarized into financial statement/report for stakeholders of the business. The objective of financial reporting is to provide financial information about the concerned business that is useful to stakeholders including investors, lenders and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit.
Financial reporting is concerned with the presentation of financial statements in a form for comprehension by users of financial information. It is essentially a process of communicating financial information and also represents an instrument of identifiable stewardship (Nwanyanwu, 2013). Similarly, Adebayo, (2005) opine that financial reporting is the medium of communicating information about the financial affairs of both profit and non-profit organizations. Considering the nature of the informal sector, most businesses in the sector keep very minimal accounting records and hardly produce financial reports.
The quality of a financial report depends on the extent to which the information contained therein can be relied on to make informed and useful investment decisions. Pivac, Vuko, and Cular (2017) provide a lost of 44 disclosure items that must be contained in the financial report for it to be considered to be of good quality. Before we provide a list of these disclosure items, it is important to note that the mere fact that financial report contains all the elements listed below does not on its own mean that it is of good quality:
Elements of Disclosure Items for Quality Financial Reports
1-Executive summary and key financial indicators;2-Company profile;
3-Business activities;
4-Short companyvreview;
5-The most important achievements in the reporting year;
6-Position on the business market;
7-Report by the supervisory board;
8-Report by the management board;
9-Code of Corporate Governance (CC G);
10-Annual survey of the CC G;
11-Management board members;
12-Members of the supervisory board; 13-The authority of company bodies;
14-Organizational structure;
15-Expectations for future periods;
16-The mission and vision of the company;
17-Corporate strategy;
18-Relationship to stakeholder group - customers;
19-Relationship to stakeholder group - shareholders;
20-Major shareholders;
21-The report on the movement of company shares;
22-Relationship to stakeholder group – suppliers;
23-Relation to employees;
24-Structure of employees;
25-Corporate social responsibility;
26-Company contributions to economic prosperity;
27-Environmental protection;
28-Quality management; 29-Business environment risk;
30-Competition risk;
31-Industry risk;
32-Liquidity risk;
33-Business risk;
34-Accounting policies;
35-Financial indicators;
36-Balance sheet;
37-Income statement;
38-Cash flow statement;
39-Statement of changes in equity;
40-Notes in financial statements;
41-Responsibility for the financial statements;
42-Independent auditor’s report;
43-Events after the balance sheet date;
44-Contact information.
Adapted From: Pivac, Vuko and Cular (2017)
References
Adebayo, A. (2005). Financial reporting: an aid to efficient economic management in the public sector, The Nigerian Accountant, 4(1), p.33.Nwanyanwu, L. A. (2013). Financial reporting and organizational liquidity in Nigeria: the accounting bases perspective, Research Journal of Finance and Accounting, Vol.4, (16)
Phillips, F. (2011). Fundamentals of financial accounting, (3rd edition.). Boston: McGraw-Hill Irwin, ISBN 9780073527109.
Pivac, S., Vuko, T. and Cular, M. (2017) Analysis of annual report disclosure quality for listed companies in transition countries, Economic Research-Ekonomska Istraživanja, 30:1, 721-731
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