Financial reports help creditors assess the solvency, liquidity and creditworthiness of businesses. It’s a means of ensuring that the company is being run appropriately. It provides vital information about the financial health and activities of the company to its stakeholders including its shareholders, potential investors, consumers, and government regulators.
Financial transparency means timely, meaningful and reliable disclosures about a company’s financial performance. Companies need to provide transparent financials to raise capital. Investors need transparent financials to make informed investment decisions. Because people make big decisions regarding the investments based on financial reporting.
Investors want more transparent information about the financial data of the company depending heavily on a company’s balance sheet, its statement of cash flows and its income statement. And for publicly traded companies all of the financial statements are created and reported according to the financial accounting standards set forth by the Financial Accounting Standard Board (FASB).
Without the information provided by financial accounting, investors would’ve less understanding about the history and current financial health of stock and bond issuers. The requirements set forth by the FASB create consistency in the timing and style of financial accounts, which means that investors are less likely to be subject to accounting information that has been filtered based on a firm’s current condition.
As well as with lending decisions a number of common accounting ratios that creditors rely on, such as the debt-to-equity ratio and times interest earned ratio, are derived from the financial statements. Even for privately owned businesses that don’t necessarily follow the requirements of the FASB, no lending institution assumes the liability of a large business loan without critical information provided by financial accounting techniques.
