Page 137 - DCOM409_CONTEMPORARY_ACCOUNTING

Contemporary Accounting

Notes
Figure 11.1: Components of financial statement

11.1 Objectives of Financial Statements

Basically, there are three objectives of financial reporting:

To give information useful for making investment and credit decisions. Financial reporting
should offer information that can help present and potential investors and creditors to
make rational investment and credit decisions. The information should be in the form that
is easy and understandable to those who have some understanding of business and are
willing to study the information carefully.

To provide information useful in assessing cash flow prospects. Financial reporting should
supply information to help present and potential investors and creditors appraise the
amounts, timing and possible risk of expected cash receipts from dividends or interest and
the proceeds from the sale, redemption or maturity of stocks or loans.

To provide information about business resources claims to those resources and changes in
them. Financial information should give information about the company’s assets, liabilities
and shareholders equity.
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 are “general purpose” because most of the users are outside the
business. Because of potential conflict of interest between managers, who must prepare the
statements and the investors or creditors, who invest in or lend money to the business, these
statements are often audited by outside accountants (known as auditors) to increase creditability
and reliability.

Self Assessment

Fill in the blanks:
1. ……………. means recording each transaction that takes place and further, summarizing
the records for financial communications.
2. A …………..is summarised data, collected and organised according to logical and consistent
accounting procedure.
3. 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 …………...

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