This lecture covers free practice CPA questions on the FAR section covering objectives of financial reporting.
Objectives of Financial Reporting
The objective of financial reporting is the foundation of the conceptual framework. Other aspects of the framework—qualitative characteristics, elements of financial statements, recognition, measurement, and disclosure—flow logically from the objective. Those aspects of the framework help to ensure that financial reporting achieves its objective.
The objectives of financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling, or holding equity and debt instruments, and providing or settling loans and other forms of credit. To make effective decisions, these parties need information to help them assess a company’s prospects for future net cash flows, which will support payments and/or provide a return to existing and potential investors, lenders, and other creditors. Information that is decision-useful to capital providers may also be useful to other users of financial reporting, who are not capital providers.
As indicated in Chapter , to provide information to decision-makers, companies prepare general-purpose financial statements. Objectives of financial reporting help users who lack the ability to demand all the financial information they need from an entity and therefore must rely, at least partly, on the information provided in financial reports. However, an implicit assumption is that users need reasonable knowledge of business and financial accounting matters to understand the information contained in financial statements. This point is important. It means that financial statement preparers assume a level of competence on the part of users. This assumption impacts the way and the extent to which companies report information.
The primary objective of financial reporting is to provide useful information for decision making. The importance to our economy of providing capital market participants with information was discussed previously, as were the specific cash flow information needs of investors and creditors