Financial Reporting System: Elements, Budgets, and Processes

This report provides a comprehensive overview of the financial reporting system, a crucial method for businesses to communicate their performance to stakeholders. It details the key elements, including the balance sheet, profit and loss statement, and cash flow statement, explaining their roles in presenting a company's financial position and performance. The report also explores various budgeting methods, such as activity-based and operational-based budgeting, highlighting their differences and similarities. Furthermore, it discusses the budgeting process, emphasizing factors such as industry standards, cost minimization, employee involvement, and the comparison of budgeted versus actual performance, along with the importance of contingency budgets. The report concludes by providing an in-depth analysis of financial reporting and budgeting, offering valuable insights for students and professionals in finance.

Running Head: Budget 1
Financial Reporting System
Institution
Date

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Budget
FINANCIAL REPORTING SYSTEM
The financial reporting system is a method which companies or entities show or demonstrate
their performance to government, creditors, investors and various stakeholders through
preparation and presentation of proper financial statements (Ashraf, Michas & Russomanno,
2019). Provision of financial information is the core purpose of the financial reporting system.
Such information is relevant to creditors and both potential and existing investors on matters
concerning decision making regarding how best they will put their resources on the reporting
company. Such decisions include provision and settlement of loans, acquisition, holding or
disposing equity and debt instruments (Flower & Ebbers, 2018).
ELEMENTS OF FINANCIAL REPORTING SYSTEM
Balance sheet
It is a report that shows both monetary condition and position of a business in a particular
time. The balance sheet comprises of properties or assets which are controlled or owned by the
company and liabilities or debts the company owes to creditors or financial institutions and the
owners equity. An income report statement records all changes in equity however, it does not
report changes in shareholders’ transactions such as payment of dividends (Yousefi, 2019).
Profit & loss statement
Also known as the income report and it provides a financial performance report of a
company or an entity within a given time .profit and loss statement has its elements which
comprises of Gains, Losses Expenses and Revenues. Cash payments and receipts in a company
are reflected by a cash flow statement subject to a particular period of time. Additionally, the
management report entails financial aspects such as the nature of business, the future and prior
performance of the company.

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Budget
Activity based budget
This is a type of budget where by all cost incurring activities are put together and
analyzed .the relationship between these costs and their drivers are clearly defined in activity
based method of budgeting (Hall et al, 2017). It is the most preferred method compared to the
operation based method of budgeting because the overhead costs and their respective drivers are
classified well; therefore, the determination of true overhead costs will be easy. In addition, it is
possible to control activity costs in budget based method if the volume of activities is regulated.
Cost drivers are elements that cause anything related to cost occurrence. Such drivers include;
the volume of production and the overall number of hours taken to complete production (Liao &
Kuo, 2019)
Operating based budget
This method of budgeting is based on mere assumptions of conditions almost similar to
the one used on already formulated budget. However, variations in business environment may
cause a huge impact on the company’s cost structure or revenues. The expected results on cost
structure and revenues will have a big variation compared to the actual results.
Differences
Operational based budget/traditional budgeting Activity based budget
a) Based on accounting
b) Depended on expenditure levels of past
years
c) Does not provide accurate results
d) It is a simple structure
e) Concentrates more on structures and
not processes
a) Based on decisions
b) Does not depend on the expenditure
levels of the previous years
c) Very accurate and clear
d) A more complex structure
e) Focuses more on activities rather than
structure

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Budget
Similarities
Activity and operation based budgeting have the following similarities; both methods are f
formulated ways of costs allocation to various business yields. Finally, both methods charge
costs against products depending on cost drivers.
Contingency budget
This is the budget meant to cover events that are likely to occur but are not captured in the
budget estimates. The aim of this budget is to provide compensation for uncertain risk exposures.
Something that is likely or unlikely to occur is a contingency. It is therefore important to
determine the possible approach to such unforeseen but potential events by putting aside
contingency funds.
BUDGETING PROCESS
Budgeting is the development of expenditure process by deciding future expenditure and income.
The process is mainly done in order to ascertain and keep in track income and expenditures. The
management and control of finances in a business is monitored through this process (Hollberg,
Lützkendorf & Habert, 2019). The following are factors to consider when formulating a budget;
Analysis of standards and practices in the industry
The budget should adhere to the rules and practice of the industry. The regulations and rules in
used should be pertinent to the company (Ebdon, 2015).
Plan to minimize avoidable costs
Ensure full control and regulation of common and avoidable expenses. During liquidity costs that
are not important should be crunched. Also the employees should be empowered to develop or
come up with strategies which are low cost oriented.

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Budget
Employees’ involvement
The budget and the respective targets should be shared to the staffs or employees for them and be
accountable for their targets. Additionally, appraisal and rewards should be introduced with the
aim of awarding those who will meet their targets.
Comparison of budgeted and actual performance
The business‘s actual performance should be compared against its performance
periodically. Thereafter a justified reason and corrective measures should be taken immediately
if there is any deviation in budgeted performance and actual performance. Additionally, the
review for the same should be conducted on a continuous basis .This will result in a better
overall control (Jakobson, 2017).
Unforeseen costs should be factored when formulating a budget. Other expenditures may
arise as a result of external factors or external environment. It is therefore important to put up a
separate budget fund to cater for such expenses.

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Budget
REFERENCES
Ashraf, M., Michas, P. N., & Russomanno, D. (2019). The Impact of Audit Committee
Information Technology Expertise on the Reliability and Timeliness of Financial
Reporting. Available at SSRN 3441789.
Ebdon, C. (2015). Citizen Participation in the Budget Process. In Encyclopedia of Public
Administration and Public Policy-5 Volume Set (pp. 1-4). Routledge.
Flower, J., & Ebbers, G. (2018). Global financial reporting. Macmillan International Higher
Education.
Hall, M., Robins, C., Owens, K., Nowatzke, J., Lauck, T., & Smith, L. E. (2017). High
performance supercomputing on a budget. Journal of Computing Sciences in
Colleges, 32(4), 86-92.
Hollberg, A., Lützkendorf, T., & Habert, G. (2019, August). Using a budget approach for
decision-support in the design process. In IOP Conference Series: Earth and
Environmental Science (Vol. 323, No. 1, p. 012026). IOP Publishing.
Jakobson, L. (2017). Russian experts: missing actors of the budget process. Post-Communist
Economies, 29(4), 491-504.
Liao, W. J., & Kuo, N. L. (2019). Capital Management and Budgeting in Taiwan. In Capital
Management and Budgeting in the Public Sector (pp. 258-279). IGI Global.
Yousefi, M. S. R. (2019). Public Sector Balance Sheet Strength and the Macro Economy.
International Monetary Fund.