Financial Reporting: Definition, Importance, and Concepts

This document provides an overview of financial reporting, including the definition, importance, and concepts. It discusses the role of reporting entities and the fundamental qualitative characteristics of relevance and representational faithfulness. The case study of Domino Pizza's annual report is also included.

Financial Reporting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1.Reporting entity – Definition, Description, Discussion & Identification.....................................1
Definition....................................................................................................................................1
Description .................................................................................................................................2
Discussion & Identification........................................................................................................3
2. Fundamental Qualitative Characteristic - Understanding of Relevance and Representational
faithfulness.......................................................................................................................................3
CONCLUSION ...............................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Financial reporting deals with communicating the financial information such as the
financial statements to the users such as creditors or investors. Financial reporting is been viewed
mainly as the companies issuing the financial statements. Main financial statements are income
statement, balance sheet and cash flow statement. Financial reporting has very broad area and not
just limited with reporting statements. Financial reports communicates all the information from
the businesses to the outside users. Anything that is being conveyed as financial information to
outside users can be termed as financial reporting. Financial reports are prepared in accordance
with reporting frameworks given by the accounting authorities and regulatory bodies. Present
report will provide about the concept of reporting entity and the essential of reportig entity. The
annual reports of Domino Pizza of year 2019. Report will also provide for relevance and
representational faithfulness of the useful information given in financial statements.
MAIN BODY
1.Reporting entity – Definition, Description, Discussion & Identification.
Reporting Entity
Definition
''Reporting entities are described as circumscribed area of the business activities for
interest of potential and present investors or other capital providers. ''
Reporting entity is defined as an entity, where it could be adequately expected that users
are there who are dependent over GPFR (General Purpose Financial Report) for gaining the
understanding about the financial performance and position of company. Also are dependent for
making decisions that are taken on the financial informations and the other relevant information
that is controlled within the financial reports. The users are employees, members, shareholders,
lenders, creditors, or the potential investors (Tan and Low, 2017). It requires that reporting entity
not to be over the business activities which are incorporated as legal entity – therefore
partnerships, sole proprietorship, associations & the group entities would be falling within the
description.
Definition of reporting entity is primarily based over notion of the financial
accountability. Primary governments are primary accountable for organisations making up legal
entity. On the other hand a non reporting entity can be defined as an entity where it has been
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defined by the governing authorities that it does not have users dependent on GPFR. They are
permitted to prepare special purpose financial reports.
Description
Those charged with the governance are required to document whether the companies are
having the users which are dependent over the GPFR for enabling them in defining whether an
entity is an reporting entity or a non reporting entity. It is essential for determining the financial
frameworks which are to be used. Reporting companies include large private corporations, listed
public corporations with extremal users or shareholders having no access of the financial
information other than financial reports and the public interests entities like educational
institutions. An entity defined as reporting entity has to prepare the reports as per the GPFR. It
states that Accounting standards laid down by the accounting board are required to be applied
while preparing the financial reports (Carini and Teodori, 2020). All the reporting frameworks
have risks associated with it. The major risk is in identifying whether an entity is a reporting
entity or not.
It is essential for reporting entities to prepare & publish the financial statements
Financial statements should be prepared keeping that they should have legitiomate
demand for information provided by financial statements. It inter alia means that information
given by financial statements requires to be useful. The financials should report over the
transactions and other events of the organisations affecting the financial performance & financial
position. The reporting has to provide useful financial information.
Reporting Entity Concept
There are various alternative concepts on reporting entities are implicit in the existing
regulations and legislations specifying the entities required to prepare the GPFR. Concepts
include concept of legal entity that is employed in private sector legislations, and broad concept
on the accountability of the elected representatives & appointed officials, employed in public
sector. In public sector, accent over accountability has viewed widespread application of funds
concepts of reporting, that implies concerns related to the reporting of results of the individual
funds (Velte and Stawinoga, 2017). Concepts based over accountability of the elected
representatives & the appointed officials have led the entities having such officials or
representatives preparing the general purpose financial reports.
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Discussion & Identification
Judgement is required for identifying whether an entity satisfies the criteria for reporting
entity. Entities operating in public sector and having the implications of factors ''like separation
of the management from the economic interests , political or economic influence and financial
characteristics'' is that the most government department & statutory authorities are the reporting
entities. It arises due to separation of between parties with economic interests in activities which
are undertaken in this sector (Reporting Entity, 2019). Practical use of above factors is to
identify the entities that are not the reporting entities.
Applying the concept of reporting entity in public sector will have the implications that
whether at State, Federal, Territorial or at level of local government, will be identified as
reporting entity. It is expected that users will be requiring the financial reports for decision
making. Individual statutory authority and department can be termed as reporting entity because
of the political or economic significance. In the private sector reporting entities are identified as
entities with significant separation between membership/ ownership and the management such as
listed trusts and the public companies (Haller, 2016). Entities with the management and members
as identical group are not identified as reporting entity based on this concept. For example
entities raising debt or equity will be classified as reporting entity as it will arise potential users
requiring the financial reports. Classification of reporting will not be constant in all the reporting
periods.
Domino Pizzas is considered as reporting entity as it is a listed public company. It has
management and members separate unit, which makes it reasonable to expect that the users of
financials statements exists. This makes company a reporting entity.
2. Fundamental Qualitative Characteristic - Understanding of Relevance and
Representational faithfulness
Consolidated financial statements that are prepared by the Dominos are accurate and no
misrepresentation was identified by the auditors during audit of the company documents.
Auditors claim that financial statements prepared by the firm are fair and accurate and rules and
accounting standards related to USA are followed strictly. Results of the business operations for
the three years are in conformity to the general accepted accounting principles of the USA.
Company maintained a strong internal control over financial activities of the business. In the
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annual report it is observed that Dominos change the way in which accounting for the revenue
and cash as well as equivalent was done in the business. Accounting for the share-based
compensation is also changed significantly which reflect that Dominos take a lot of steps to
improve its accounting process (Cao, Chychyla and Stewart, 2015). Newly taken steps make
accounting statements more relevant and useful for the investors. Thus, it can be said that
accounting statements prepared by the chartered accountants of the Dominoes are accurate and
completely reliable in nature. It is well known fact that Dominos top management is solely
responsible for maintaining strict grip over the internal control on the financial business
transactions. Time to time top management of the Dominos evaluate internal control mechanism
to ensure that it is working at its best and there is no chance of the fraudulent activity in
accounting operations of the company. Company financial statements can be validated from the
disclosures that are given in the annual report. These disclosures to great extent indicate the way
in which calculation is done and sources from which that specific value is created.
Such kind of things reflect that firm perform operations with full transparency and
shareholders by evaluating financial statements can identify business activities of the firm and
way in which it operates its business in the entire year. Thus, it can be said that Dominos take
every step to ensure that accounting done by it is completely reliable and is of great use. On
varied things estimates are also made by the accountants and same are given in the annual report
(Guay, Samuels and Taylor., 2016). Auditors analyse these estimates and identify that these were
framed correctly which reflect that accountant of the Dominos perform their task accurately and
they take all necessary steps to ensure that they are in right direction. Dominos top management
believed in the transparency of the company operations and due to this reason, each and every
disclosure is made in the annual report by analysing which one can easily identify extent to
which company financial statements are prepared in the fair manner. Thus, it can be said that
accounting process of the Dominos is accurate and is highly reliable. Dominos is known for its
ethical approaches and its name is not taken with the large size firms that were identified indulge
in the manipulation of facts of business. Thus, overall it can be said that company accounting
statements are highly reliable in nature.
Income statement, balance sheet and cash flow statement are the three financial
statements have due importance for the firm. Income statement assist one in identifying
operating expenses, non-operating expenses, revenue and profit. By considering these variables
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business performance is accessed. On other hand, balance sheet is another important financial
statement. It is also known as statement of financial position which reflect assets and liabilities
that are in the business. Third important statement is the cash flow statement which reflect the
cash flow from operating, investment and financing activity. This statement reflects that in which
of activities profit and loss is observed (Robinson and et.al., 2015). All these three financial
statements are equally important for the firm but when income statement and balance sheet is
compared then in that case it can be said that latter one if more useful for the firm. This is
because income statement only indicates firm capability to control expenses in the business and
profit earned by performing operations but balance sheet assist firm in evaluating multiple areas
of the business. By applying ratio analysis of the balance sheet can be done to identify efficiency
of asset utilization, availability of current asset to pay current liability, firm capability to convert
inventory into cash, ability to utilize capital in efficient and effective way. Thus, it can be said
that scope of analysis of balance sheet is more then income statement and in comparison, to latter
one it assists firm to evaluate its multiple business operations. Hence, it can be said that balance
sheet is more useful for the managers then income statement.
On cash flow statement, ratio analysis approach can not be applied but it indicates whether
cash flows are positive or negative on operating, investment or financing activity. Thus, by using
cash flow statement one easily finds out that on which of the mentioned activities performance
was relatively good or bad if compared to the previous year (Easton and Sommers, 2018). If both
cash flow statement and balance sheet are compared with each other then in that case it can be
said that latter one if more valuable for the firm. This is because cash flow statement only covers
performance of the operating, investment and financing activity but balance sheet covers
multiple fronts. Thus, it can be said that there is huge significance of all three statements but out
of all of them balance sheet have significance for the firm.
CONCLUSION
It could be concluded from the above study that reporting entities are required to prepare
the financial statements as GPFR. The entities are regarded as the reporting entity based on
three factors of reporting entity concepts. Applying the above concepts it is identified that
Domino pizza is a reporting entity.
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REFERENCES
Books and Journals
Cao, M., Chychyla, R. and Stewart, T., 2015. Big Data analytics in financial statement
audits. Accounting Horizons. 29(2). pp.423-429.
Guay, W., Samuels, D. and Taylor, D., 2016. Guiding through the fog: Financial statement
complexity and voluntary disclosure. Journal of Accounting and Economics. 62(2-3).
pp.234-269.
Robinson, T.R. and et.al., 2015. International financial statement analysis. John Wiley & Sons.
Easton, M. and Sommers, Z., 2018. Financial Statement Analysis & Valuation, 5e.
Tan, B.S. and Low, K.Y., 2017. Bitcoin–Its economics for financial reporting. Australian
Accounting Review.27(2). pp.220-227.
Carini, C. and Teodori, C., 2020. Reporting Entity in the Consolidated Financial Statements:
Theory and Case Study. In Tools, Strategies, and Practices for Modern and Accountable
Public Sector Management (pp. 65-96). IGI Global.
Haller, A., 2016. Value creation: a core concept of integrated reporting. In Integrated
reporting (pp. 37-57). Palgrave Macmillan, London.
Velte, P. and Stawinoga, M., 2017. Integrated reporting: The current state of empirical research,
limitations and future research implications. Journal of Management
Control.28(3).pp.275-320.
Online
Reporting Entity. 2019. [Online]. Available through :
<https://www.aasb.gov.au/admin/file/content102/c3/SAC1_8-90_2001V.pdf>.
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