Objectives of financial reporting
/What are the Objectives of Financial Reporting?
The objectives of financial reporting cover three areas, dealing with useful information, cash flows, and liabilities. The objectives are noted below.
Objective #1: Provide Useful Information
The first objective is to provide useful information to the users of financial reports. The information should be useful from a number of perspectives, such as whether to provide credit to a customer, whether to lend to a borrower, and whether to invest in a business. The information should be comprehensible to those with a reasonable grounding in business, which means that it should not be laced with jargon or burdened with so much detail that it is impossible to extract the essentials about a business from its financial statements.
Objective #2: Provide Cash Flow Information
The second objective is to provide information about the cash flows to which an entity is subjected, including the timing and uncertainty of cash flows. This information is critical for determining the liquidity of a business, which in turn can be used to evaluate whether an organization can continue as a going concern.
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Objective #3: Provide Liability and Economic Resources Information
The third objective is to disclose the obligations and economic resources of an entity. There should be an emphasis on the changes in liabilities and resources, which can be used to predict future cash flows. This information is contained within a reporting entity’s balance sheet, for which an example appears in the following exhibit. In the exhibit, economic resources appear within the assets section at the top, while liabilities appear lower down in the report.
Source of the Financial Reporting Objectives
The preceding objectives were developed within the framework of a capitalist society, where accurate and complete information is needed in order to operate efficient capital markets. This list is an expanded version of the objectives set forth by the Financial Accounting Standards Board (FASB). The FASB assumed that creditors and investors would be the primary users of financial reports, and so developed a list of objectives that matches their needs.
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