Reporting Cycle

An entire sequence of a reporting period that guides the preparation of financial statements

What is the Reporting Cycle?

The reporting cycle involves the running, managing, updating, and reporting of a company’s accounts. The cycle usually runs concurrently with the planning and budgeting cycles. It ensures that the company is ready to begin the following period. A company’s planning/budgeting cycles and reporting cycle are usually independent of each other but can involve the same people in their preparation.

 

Reporting Cycle

 

The planning cycle involves future estimations in spending and income cashflows while the reporting cycle gives the current standings of the company, with regards to assets, revenue, and expenses, after a specified period of business time. Therefore, the planning cycle looks forward in terms of time, while the reporting cycle looks backward on business activity and the most recent standings.

 

Quick Summary

  • The reporting cycle is an entire sequence of a reporting period that guides the preparation of financial statements.
  • The reporting cycle period can be a year, fiscal quarter, or a specified period.
  • The cycle begins with the initial transaction entries in the journal and ends with the published financial statements of the company and the closing of all the temporary accounts.

 

Reporting Cycle Regulations

Reporting of business performance, especially for public companies, is mandatory all over the world. The reporting cycle should, at most, be for a year or less. Such a regulation helps in transparency in the running of public companies. Investors own publicly held companies through the purchase of shares, and they are required to pay dividends to stockholders at least once annually. The financial reports, therefore, enable the investors to follow such events with ease.

Financial statements that companies are obliged to report on include the income statement, cash flow statement, statement of retained earnings, and statement of financial position. They are the basic statements that allow the public to understand the financial performance of the company during a given period.

 

Benefits of the Reporting Cycle

The reporting cycle of any company is important in providing vital information to its shareholders, directors, employees, competitors, and financial analysts. The financial statements published during the reporting cycle provide an overview of the performance of the company.

For example, the income statement details the sales revenue for a specific period, expenses incurred by the company, interest incomes earned, and the net profit for the period. The statement of financial position, also known as the balance sheet, gives the net value of assets owned by the company at the end of a financial period.

The net value of all assets factors in their depreciation and their current value in the market. The statement of retained earnings indicates how the company’s directors allocated the net profits for the period to the retained earnings account and the dividend account for distribution to stockholders.

 

An Account in the Reporting Cycle

The account is the basic building block of a reporting cycle, and it takes a record of each transaction performed by the company. A transaction, on the other hand, is an activity undertaken by the business to serve a client. Transactions cause a change in the financial earnings, either as an income for the company or an expense where it spends money.

Accounts fall in categories, such as revenue, liability, equity, assets, and expenses. An account must be unique from other accounts in the company. Therefore, every account comes with a distinct account number and name. The account’s balance is always either a debit or credit balance.

 

A Transaction in the Reporting Cycle

A transaction can be either financial or non-financial. Transactions can be recorded either as accrual or cash transactions. The number and state of transactions seldom depend on the size of the company and the traffic of activities therein. Examples of transactions include expenses, paying dividends, assets acquisition, writing off bad debt, a sale, revenues earned, etc.

Transactions are entered into the journal chronologically. The order of occurrence of transactions dictates their order. It allows for easy follow-up in case one requires a better explanation of the contents of the financial report.

 

Closing the Reporting Cycle

The reporting cycle is closed by preparing and publishing financial statements. The reported statements should be cross-checked for errors through auditing to make final adjustments before they are released to the public. The financial statements are discussed with the directors before publishing. The final report should undergo an auditor’s scrutiny before being released to the public.

An auditor should read in between the lines to highlight any inconsistencies and outright errors in the report. The auditor checks whether the report conforms to the laid out accounting principles and whether it portrays a true financial state of the firm. If the auditor is satisfied with the report and gives an unqualified opinion, the report is released to investors, shareholders, and the general public through the mainstream media or the company’s own channels of communication.

 

Related Readings

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.

In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

  • Earnings Guidance
  • Projecting Balance Sheet Line Items
  • Three Financial Statements
  • Types of Due Diligence

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