OBJECTIVES OF FINANCIAL REPORTING
Financial reporting provides information that is useful in making business and economic decisions. The objectives of general purpose external financial reporting primarily come from the needs of external users who must rely on information that management communicates to them.
SFAC (Statement of Financial Accounting Concepts) No. 1 describes the objectives of financial reporting. The financial reporting has the following major objectives:
- Financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. The information should be comprehensive to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence.
- Financial reporting should provide information to help present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds from the sales, redemption, or maturity of securities or loans. Since investors` and creditors` cash flows are related to enterprise cash flows, financial reporting should provide information to help investors, creditors, and others assess the amounts, timing, and uncertainty of prospective net cash inflows to the related enterprise.
- Financial reporting should provide information about the economic resources of an enterprise, the claims to those resources (obligations of the enterprise to transfer resources to other entities and owners` equity), and the effects of transactions, events, and circumstances that change its resources and claims to those resources.
The primary focus of financial reporting is ordinarily considered to be information about earnings and its components. Earnings analysis gives clue to (a) management`s performance, (b) long-term earning capabilities, (c) future earnings, and (d) risks associated with lending to and investing in the enterprise.
Financial reporting should also provide information about how management has discharged its stewardship function to stockholders for the use of the enterprise`s resources entrusted to it. Management is responsible not only for the custody and safekeeping of enterprise resources but also for their efficient and profitable use.
Management through financial reporting can provide significant financial information to users by identifying events and circumstances and explaining their financial effects on the enterprise. However, investors, creditors, and others who rely on financial reporting must do their own evaluating, estimating, predicting, and assessing and not rely exclusively on management`s presentations.