Why is financial reporting important to small business Essay

Why is financial reporting important to small business - Essay Example 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 &Â  Tracy, J., 2011). These documents are essential to a small business various ways. 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. 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