Why is financial reporting important to small business - Essay Example

Importance of Financial Reporting to a Small Business Introduction Financial reporting involves the disclosure of financial info to the users of such information for decision-making. Financial reporting is vital for all businesses irrespective of their sizes (American Institute of Certified Public Accountants, Inc. 2013). However, the size of the business can affect the nature of disclosure they make to their stakeholders. Financial statements provide a summary of business activities, income and cash flow information of the business for a given period (Lynch, 2000).

This document examines the importance of financial reporting to a small business. The financial reporting involves making a summary of financial information in accordance with accounting standards for the users of such information. Financial reporting involves preparing various financial statements for easier understanding by respective users of such information (American Institute of Certified Public Accountants, Inc. 2013). The three financial statements have different uses to the business and its stakeholders.

However small a business entity may be they all require the financial statements namely statement of cash flows, income statement and statement of financial position of the company (Tracy, T & Tracy, J., 2011). These documents are essential to a small business various ways.Statement of cash flows Statement of cash flows is an essential financial report to a small business because it shows cash inflows and outflows of the business (Revees, 2011). It provides summary information on the balance sheet and income statement so that the users of such information can obtain information about business activities and profitability of the business activities.

It gives an overview of how well the business out is carrying out its activities. It shows the solvency of the business.Statement of financial position According to Lynch (2000), statement of financial position or balance sheet is a financial statement that demonstrates the financial position of the business at a given time, usually at the end or the trading period. It can be shown in the form of the equation as follows. Assets = Liabilities + owner’s equity. This statement provides the users of such statement with a snapshot of the business resources or assets.

Liabilities represent what business owner external financiers while owner’s equity represents what business owes shareholders or individual investor in case of a sole proprietorship. The equation must balance at all times. Therefore, statement of financial statement is essential for the small business because it shows the total worth of the business and what the owner and other external financiers or creditors have invested in the business separately (Revees, 2011). Also, it helps managers in making decision on sources of funds to finance it activities.

Income Statement The income statement is a financial statement that shows whether the business is an operation for loss or profitably (Longenecker et al., 2013). It provides the summary of market activities or sources of revenue and expenditure of the business and provides the difference between revenue and expenditure of the business during the trading period. This statement is very critical to a small business because it helps the managers in deciding the pricing strategies and marketing decisions to maximize revenue and minimize expenditures (Longenecker et al., 2013). Conclusion The financial reporting involves preparing various financial statements namely, statement of financial position, statement of cash flow and income statement.

These statements help various users of such information to make different decisions. When preparing the financial report accountants must follow accounting standards in order to ensure their reliability and understandability by the users. List of referencesAmerican Institute of Certified Public Accountants, Inc. 2013, Financial Reporting Framework for Small and Medium-Sized Entities, Pp. 188. Retrieved on 10th May 2015 from http://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/PCFR/DownloadableDocuments/FRF-SME/FRF-SMEs-Framework.

PDFLongenecker, J., Petty, J., Palich, L & Hoy, F 2013, Small Business Management, Cengage Learning. Pp. 736.Lynch, M 2000, How to Read a Financial Report, Merrill Lynch Response Centre, Pp. 44. Retrieved on 10th May 2015 from http://www.princeton.edu/jrc/conferences/financial-markets/Merrill_Lynch_How_to_Read_A_Financial_Report.pdfRevees, H 2011, Financial Statement Analysis for Small Businesses a Resource Guide, Virginia Small Business Development Centre Network, Pp. 47. Retrieved on 10th May 2015 from Http://www.hrsbdc.org/wpcontent/uploads/2011/04/VSBDCFinancialStatementResourceGuide.

pdfTracy, T. C. Tracy, J. A. 2011, Small Business Financial Management Kit for Dummies, John Wiley & Sons. Pp. 384