Objectives of Financial Reporting
The first objective is the most general and is to provide information that is useful in making investment and credit decisions. As we indicated earlier, investors and creditors are the primary focus of external financial reporting. We believe that, by meeting the information needs of investors and creditors, we provide general information that is also useful to many other important financial statement users.
The second objective, which is more specific than the first, is to provide information that is useful in assessing the amount, timing, and uncertainty of future cash flows. As we discussed earlier, investors and creditors are interested in future cash flows to them, so an important objective of financial reporting is to provide general information that permits that kind of analysis.
The most specific objective of external financial reporting is to provide information about the enterprise’s resources, claims to those resources, and how both the resources and claims to resources change over time. An enterprise’s resources are often referred to as assets, and the primary claims to those resources are the claims of creditors and owners, known as liabilities and owners’ equity.
One of the primary ways investors and creditors assess whether an enterprise will be able to make future cash payments is to examine and analyze the enterprise’s financial statements. In the general sense of the word, a statement is simply a declaration of something believed to be true. A financial statement, therefore, is simply a monetary declaration of what is believed to be true about an enterprise. When accountants prepare financial statements, they are describing in financial terms certain attributes of the enterprise that they believe fairly represent its financial activities.
Financial statements prepared for periods of time shorter than one year (for example, for three months or one month) are referred to as interim financial statements. Throughout this text, we use both annual and interim financial statements, but our primary focus is on annual financial statements. As you approach a company’s financial statements—either as a user or as a preparer—it is important to establish the time period those statements are intended to cover.
The primary financial statements are the following:
- Statement of financial position (balance sheet). The balance sheet is a position statement that shows where the company stands in financial terms at a specific date.
- Income statement. The income statement is an activity statement that shows details and results of the company’s profit-related activities for a period of time (for example, a month, quarter [three months], or year).
- Statement of cash flows. The statement of cash flows is an activity statement that shows the details of the company’s activities involving cash during a period of time.
The names of the three primary financial statements are descriptive of the information you find in each. The statement of financial position, or balance sheet, for example, is sometimes described as a snapshot of the business in financial or dollar terms (that is, what the enterprise looks like on a specific date). An income statement is an activity statement that depicts the profitability of an enterprise during a designated period of time. The statement of cash flows is particularly important in understanding an enterprise for purposes of investment and credit decisions. As its name implies, the statement of cash flows depicts the ways cash has changed during a designated period. While the interest of investors and creditors is in cash flows to themselves rather than cash flows of the enterprise, information about cash activity of the enterprise is considered to be an important signal to investors and creditors regarding future cash flows to themselves.
- William J., Bettner M., & Carcello, J. (2021). Financial & Managerial Accounting19th Edition. McGraw-Hill Education. ISBN13: 9781260247930
- Google Image (2021).