What are businesses made for? Basically, businesses are made to earn profits by providing high quality goods and services to the consumers like the public. Different operations are carried out by these entities just to obtain their desired level of income and to establish a good reputation in the industry where they belong. Their earned income and incurred expenses for a certain period are summarized in the form of financial reports and statements that provide systematic information about the financial affairs of a business or institution to be used in decision making and strategy formulation by its owners and other users. But what is the appropriate interval of preparing these financial reports and statements? Is it daily, quarterly, or annually? To answer these questions, three criteria are set which include (1) relevance, (2) comparability, and (3) regulatory compliance. First criterion is relevance. Financial statements must provide information that is relevant to the decision- making need of users. Undue delay in the reporting of information may lose its relevance, thus reporting must be on a continuous basis.
If financial reports and statements are prepared daily, more data can be obtained and can be useful in decision making but having more data don’t necessarily imply more valuable information. In fact, there is a great possibility that the individuals and the system will be overrun with data may only result to meaningless financial reports. In contrast, preparing financial statements quarterly can help the company in analysing the seasonality regarding trends which will be of great help in making future plans and actions. While annual reports can provide visual information such as charts, graphs, and, others, there is still a great chance of obtaining old information that will no longer be relevant for the company. Comparability is the second criterion. Businesses must be able to compare and contrast financial ratios from different companies in order to understand how one company performs against their competitors. These financial ratios are designed to help one evaluate the financial reports and statements. For example, Firm A has gained a profit of 200,000 out of its 1,000,000 sales and firm B has gained 300,000 out of its 800,000 sales. Which firm has gained higher profit?
These are best evaluated by dividing its profit against their total sales. Since there are expenses that occur every few months rather than monthly, such as automobile insurance which may cause one month’s expenses to be significantly higher than those of other months, thus, derived financial ratios from daily and monthly reports can’t truly reflect what is going on in the company.However , quarterly reports work better when accounting for these occasional expenses. Annual financial statements may still provide financial ratios because they contain detailed information about the overall performance of the firm for the entire year.
Third criterion is regulatory compliance. These financial statements must be audited to make sure that all information are disclosed and all standards set by the law are followed. Daily reports and statements give auditors less time to do the auditing. There will be a greater possibility of having unwanted piles of accounting misstatements and scandals. Quarterly reports and annual reports are required by the law because of tax filings. Thus, auditors are already used to this time frame of auditing. In conclusion, the evaluation of the following criteria above shows that quarterly reports and reports are frequent enough to satisfy outside demands in most cases. Preparing and reporting financial statements and reports quarterly is the most appropriate interval to do the accounting because it satisfies the three criteria – relevance, comparability, and regulatory compliance.