Sunday, 22 September 2013

Financial Reporting Objectives and its users

The Financial Accounting Standards Board (FASB) emphasizes the needs of users when it defines the goals of financial reporting provided below:2

1. To provide information useful for making investment and credit or loan decisions. Financial reporting need to offer information that can help current and potential investors and creditors make prudent investment and credit decisions.

The reports should be in a structure that makes sense to anybody who has some understanding of business and is looking to study the information mindfully.

2. To provide information useful in assessing cash flow prospects. Financial reporting should supply facts that can help current and prospective investors and creditors judge the amount, timing, and risk of expected cash receipts from dividends or interest and the proceeds from the sale, redemption, or maturity of stocks or loans.

3. To provide information about company assets, claims to those resources, and modifications in them. Financial reporting should provide information about a company’s assets, liabilities, and stockholders’ equity, and the effect that transactions have on them.

Financial statements from time to time present to parties outside the business entity the information that has been gathered and processed in the accounting system. These statements—the balance sheet, the income statement, the statement of retained earnings, and the statement of cash flows—are the most important output of the accounting process. They are “general purpose” because of their wide audience. They are “external” mainly because their users are outside the business. Because of a potential conflict of interest between executives, who must get ready the statements, and investors or lenders, who invest in or lend money to the business, financial statements are typically audited by outside accountants to assure their credibility. 

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