External financial reporting definition
/What is External Financial Reporting?
External financial reporting includes financial statements, financial summaries, and related disclosures that are issued to users outside of a reporting entity. This information is typically used by creditors, lenders, and investors to judge the performance of a business, as well as its ability to repay debts. External financial reports may be audited, in which case the auditor’s opinion letter accompanies the financial statements. If a company is publicly-held, its external financial reports are periodically submitted to the Securities and Exchange Commission.
What are External Financial Reports?
The essential components of external financial reports are the following items:
Income statement. This report shows the revenues, expenses, and profit or loss of the reporting entity for the reporting period.
Balance sheet. This report shows the assets, liabilities, and equity of the reporting entity as of the end of the reporting period.
Statement of cash flows. This report shows the cash inflows and outflows associated with the reporting entity’s operating, investing, and financing activities for the reporting period.
Footnotes. The footnotes that accompany the financial statements contain items that are mandated by the applicable accounting framework (such as GAAP or IFRS). These footnotes include accounting policies, more detail on certain financial statement line items, and significant estimates.
Related AccountingTools Courses
External vs. Internal Financial Reporting
Internal financial reporting is used for internal decision-making within a business. This gives rise to the following differences between external and internal financial reporting:
Audience. External financial reporting is intended for stakeholders, while internal reporting is intended for management.
Purpose. External financial reporting is intended to communicate the performance and financial position of a business to its stakeholders, while internal reports are used to drive decision-making by management.
Regulatory requirements. External financial reports are constructed based on the relevant accounting framework, while internal reports can be formatted in any manner that is most useful to management.
Content. External financial reports tend to be highly summarized, while internal reports may be presented in much more detail, in order to facilitate decision-making.
Frequency. External financial reports are usually issued on a quarterly or annual basis, while internal reports may be issued much more frequently.
Confidentiality. External financial reports are distributed for general perusal and so are not confidential, while internal reports may be considered highly confidential.
Related Articles
The Elements of Financial Statements