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Pooja, Lovely Professional University Unit 11: Introduction to Financial Reporting Framework

Unit 11: Introduction to Financial Reporting Framework Notes

CONTENTS
Objectives
Introduction
11.1 Objectives of Financial Statements
11.2 Contribution of Financial Statements in Meeting the Needs of Users
11.2.1 External Users of Accounting Information
11.2.2 Internal Users of Accounting Information

11.3 Capital Market Requirements for Preparing Financial Statements
11.4 Limitations or Drawbacks of Financial Statements
11.5 Summary
11.6 Keywords
11.7 Review Questions
11.8 Further Readings

Objectives

After studying this unit, you will be able to:
Identify the contribution of financial statements in meeting the needs of users and capital
market
State the limitations of financial statements
Understand the objectives of financial statements

Introduction

Accounting is thousands of years old; the earliest accounting records, which date back more than
7 million years, were found in Mesopotamia (Assyrians). The people of that time relied on
primitive accounting methods to record the growth of crops and herds. Accounting evolved,
improving over the years and advancing as business advanced.
Accounting is the language of business throughout the world. Every business organization
keeps its financial records so that the parties interested, can have an analysis through it.
Accounting means recording each transaction that takes place and further, summarizing the
records for financial communications. Accounting is the process by which the data generated in
bookkeeping are processed, analyzed and interpreted, to be used as guidelines by the management
in framing future policies of the business.
A financial statement is summarised data, collected and organised according to logical and
consistent accounting procedure. Its purpose is to convey an understanding of some financial
aspects of a business firm the term financial statement generally refer to two statements (i) the
position statement or the balance sheet and (ii) the income statement/profit & loss account.
These statements are used to convey to management and interested parties about the profitability
and financial position of a firm.
Financial statements are the most important way of periodically presenting to parties outside
the business the information that has been gathered and processed in the accounting system.
These financial statements serve a “general purpose” as most of the users are outside the business.

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