The first objective
is the most general and is to provide information that is useful in making investment and credit decisions. As we indicated earlier, investors and creditors are the
primary focus of external financial reporting. We believe that, by meeting the information
needs of investors and creditors, we provide general information that is also useful to many
other important financial statement users.
The second objective,
which is more specific than the first, is to provide information that is Useful in assessing the amount, timing, and uncertainty of future cash flows. As we discussed earlier, investors and creditors are interested in future cash flows to them, so an important objective of financial reporting is to provide general information that permits that kind of analysis.
The most specific objective of external financial reporting is to provide information about,
Enterprise's resources, claims to those resources, and how both the resources and claims to resources change over time. An enterprise's resources are often referred to as assets, and the primary claims to those resources are the claims of creditors and owners, known as liabilities and owners equity.
One of the primary ways investors and creditors assess whether an enterprise will be able to make future cash payments is to examine and analyze the enterprise's financial statements.
In the general sense of the word, a statement is simply a declaration of something believed to be true. A financial statement, therefore, is simply a monetary declaration of what is believed to be true about an enterprise. When accountants prepare financial statements, they are describing in financial terms certain attributes of the enterprise that they believe fairly represent its financial activities.
Financial statements prepared for periods or time shorter than one year (for example, for three months or one month) are referred to as interim financial statements. Throughout this
text. we use both annual and interim financial statements. As you approach a company's
financial statements either as a user or as a preparer it is important to establish the time
period those statements are intended to, cover.
The primary financial statements are the following:
Statement of financial position (balance sheet). The balance sheet is a position statement that shows where the company stands in financial terms at a specific date Income statement. The income statement is an. activity statement that shows details and results of the company's profit-related activities for a period of time (for example, a month, quarter [three months], or year).
Statement of cash flows. The statement of cash flows is an activity statement that shows the details of the company's activities involving cash during a period of time.
CHARACTERISTICS OF EXTERNALLY
REPORTED INFORMATION
Financial information that is reported to investors, creditors, and others external to the reporting enterprise has certain qualities that must be understood for the information to have maximum usefulness. Some of these qualities are discussed in the following paragraphs
Financial Reporting-A Means:
As we learned in the introduction to this chapter, financial information is a means to an end, not an end in and of itself. The ultimate outcome of providing financial information is to improve the quality of decision making by external parties. Financial statements themselves are simply a means by which that end is achieved.
Financial Reporting versus Financial Statements:
Financial reporting is broader than financial statements. Stated another way, financial statements are a subset of the total information encompassed by financial reporting. Investors, creditors, and other external users of financial information learn about an enterprise in a variety of ways in addition to its formal financial statements (for example, press releases sent directly to investors and creditors, articles in The Wall Street Journal, and more recently, open communications via the Internet). Serious investors, creditors, and other external users take advantage of many sources of information that are available to support their economic decisions about an enterprise.
Historical in Nature
Externally reported financial information is generally historical in nature. It looks back in time and reports the results of events and transactions that already have occurred. While historical information is very useful in assessing the future, the information itself is more about the past than it 18 about the future. However, in recent years, accounting standard setters are requiring greater use of fair values, rather than historical costs, in measuring assets and liabilities.
Inexact and Approximate Measures
Externally reported financial information may have a look of great precision, but in fact much of it is based on estimates, judgments,
and assumptions that must be made about both the past and the future.
For example, assume a company purchases a piece of equipment for use in its business. To account for that asset and to incorporate the impact of it into the company's externally reported financial information, some assumptions must be made about how long it will be used by the company how many years it will be used, how many machine-hours it will provide, and so on. The fact that a great
deal of judgment underlies most accounting information is a limitation that is sometimes misunderstood.
General-Purpose Assumption
As we have already mentioned, we assume that, by providing information that meets the needs of investors and creditors, we also meet the information needs of other external parties. We might be able to provide superior information
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