What are Financial Reporting Objectives?
The objectives of the financial reporting are to assess, understand, assimilate, and correctly decimate the income as generated by the business. It helps the stakeholders to formulate a correct stance as well as take up correct decisions pertaining to the management of the business.
Explanation of Financial Reporting Objectives
The Objectives of the financial reporting is ascertaining and cross verifying the usage of resources, business performance, cash flow as well as to assess the financial health of the business. It ensures that all stakeholders are on the same page and they undertake better informed decisions with respect to managing investments in the business. The objectives of the financial reporting were formed keeping in view the capitalist markets frameworks.
The objectives asked the business during that period to maintain an accurate and complete record of financial transactions with nil miss along with no substantial information asymmetry. This was a mandate during that time in order to function in the efficient capital markets. The objectives were then later curated in the objectives as defined under the Financial accounting standards board. It ensured that the information asymmetry was removed completely and at the same time, the primary users of the financial reports namely the investors and the creditors get access to all the desired correct information.
The objectives of the financial reporting, therefore, ensure that the stakeholders provide correct and utility-based information to the end users of the financial reports such as the creditors and investors. On the basis of correct information, the lenders decide whether they should provide funds to the borrowers. The language in which financial reports are drafted helps the stakeholders understand what is happening in the business and they don’t have to waste time in understanding technical jargons.
The financing reporting also provides information on cashflows of the entity and highlights potential cashflow problems or crisis. The information is critical as pertaining to the liquidity of the business and helps the stakeholders to determine whether the business is going concern or not. The financial reporting mandates the business to disclose all trivial information about the economic resources and their obligations. It should have an emphasis on the liabilities structure modifications as well as how resources are utilized which in turn helps analysts to predict cashflows.
Objectives of Financial Reporting
There are four broad objectives of financial reporting as follows:
It shares and decimates all the critical information to the potential investors, existing investors, customers, lenders, and creditors respectively:
- The properly formulated and presented financial reporting helps the users of the financial statement to assess whether a given business is profitable or not.
- For example, the investors and creditors assess the income statement of the business for ascertain the profitability delivered by the business. The income statement generally describes the profitability position of the business and if the business is not very profitable, it will not attract any new potential investors, as well as existing investors, would run away and the lenders won’t give additional funds to help the business run operations.
It helps in monitoring the position of cash flows for the business:
- A prudent financial report helps the stakeholders determine the actual cashflow position in the business. At times income statement is not sufficient enough to ascertain on the actual cash position and hence the users may wish to access the cash flow statement to analyze the position of cashflows.
- For example, suppose a business performs several financial transactions on accrual and on a non-cash basis. There could be a situation that the business does not have the cashflow positions claimed and shown as per the transactions. Therefore, to ascertain on the figures on cash, the lenders and investors access the cashflows statements to ascertain the position of the business on cash front.
It provides information on the adoption of accounting policies applied by the business to arrive at the accounting estimates:
- At times the business has access to different types of accounting policies. Based on their requirements and usage, it may select one accounting policy and implement them to determine the accounting estimates and financial numbers to create a formal financial report. The business, therefore, has to disclose on the accounting policies front to the investors and the creditors. This allows the users of the financial statements to compare the financial statements of two companies operating in different or the same companies.
- For example, there could be two companies operating in the same industry but using different inventory valuation techniques. The first company have adopted the LIFO technique and the second may apply the FIFO technique. Therefore, the business that applies the LIFO technique would report less income as it has displays the high value of cost of sales. On the other hand, the other company may have high inventory and may overstate on income levels. Hence, it is mandatory for the business to disclose the accounting policies they apply while preparing the financial reports.
It helps in the facilitation of meaningful analysis on the asset position, equity position and liabilities position of the business:
- The users of the financial statements can note the current values of the asset position and liabilities position of the business. This would help the users of the financial statements to predict what potential course of action a business may undertake in the near future.
- For example, A company is undertaking a huge investment project and it would, therefore, like to ascertain whether the existing tangible assets can deliver on the project or not or whether it requires the business to undertake the additional purchase of new equipment. Here the management can get access to already prepared financial reports and discover their needs and requirements.
The objectives of the financial reporting are to provide and decimate financial information from the business to the end stakeholders such as investors, venture capitalists, private equity, and banks. The financial reporting as an activity helps in analyzing, tracking, and monitoring of the financial information as disclosed by the business. It helps investors and stakeholders to realize whether the business has properly utilized monetary and financial resources.
This is a guide to the Financial Reporting Objectives. Here we also discuss the introduction to financial reporting objectives with respective objectives explained in detail. You may also have a look at the following articles to learn more –
- Financial Risk
- Financial Reporting Examples
- Objectives of Financial Statements
- Financial Accounting vs Management Accounting