Objectives of financial reporting

December 26, 2017

The objectives of financial reporting are as follows:

a) Providing information to management of an organization which is used for the

purpose of planning, analysis, bench marking and decision making.
b) Providing information to investors, promoters, debt provider and creditor which is
used to enable them to make rational and prudent decision regarding investment,
credit, etc.

 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.
 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.
 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.

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.

The preceding 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.
2. MAIN ASSUMPTIONS
• Going Concern Concept- Going concern is a basic underlying assumption in accounting. The
assumption is that a company or other entity will be able to continue operating for a period of
time that is sufficient to carry out its commitments, obligations, objectives, and so on.
• Accrual concept. The accrual concept in accounting means that expenses and revenues are
recorded in the period they occur, whether or not cash is involved. The benefit of the accrual
approach is that financial statements reflect all the expenses associated with the reported
revenues for an accounting period.
• Consistency The consistency principle states that, once you adopt an accounting principle or
method, continue to follow it consistently in future accounting periods. Only change an
accounting principle or method if the new version in some way improves reported financial
results.
• Matching concept The matching concept is an accounting practice whereby firms recognize
revenues and their related expenses in the same accounting period. Firms report revenues, that
is, along with the expenses that brought them. The purpose of the matching concept is to avoid
misstating earnings for a period.
• Materiality concept Financial statement items are material if they could influence the
economic decisions of users. The materiality concept is the universally accepted accounting
principle that all material matters are to be disclosed.