Question

List the objectives of financial accounting as outlined in SFAC No 1: “Objective of Financial Reporting by Business Enterprises." Financial Accounting

Answer 1

As per the Financial Accounting Standards Board (FASB), the objectives of financial accounting outlined in SFAC No. 1 are :

1. Financial reporting is not an end in itself but is intended to provide information that is useful in making business and economic decisions.

2. The objectives of financial reporting are not immutable—they are affected by the economic, legal, political, and social environment in which financial reporting takes place.

3. The objectives are also affected by the characteristics and limitations of the kind of information that financial reporting can provide.

− The information pertains to business enterprises rather than to industries or the economy as a whole.

− The information often results from approximate, rather than exact, measures.

− The information largely reflects the financial effects of transactions and events that have already happened.

− The information is but one source of information needed by those who make decisions about business enterprises.

− The information is provided and used at a cost.

4. The objectives in this Statement are those of general purpose external financial reporting by business enterprises.

− The objectives stem primarily from the needs of external users who lack the authority to prescribe the information they want and must rely on information management communicates to them.

− The objectives are directed toward the common interests of many users in the ability of an enterprise to generate favorable cash flows but are phrased using investment and credit decisions as a reference to give them a focus. The objectives are intended to be broad rather than narrow.

− The objectives pertain to financial reporting and are not restricted to financial statement

5. The objectives state that:

− Financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. The information should be comprehensible to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence.

− Financial reporting should provide information to help present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds from the sale, redemption, or maturity of securities or loans. Since investors’ and creditors’ cash flows are related to enterprise cash flows, financial reporting should provide information to help investors, creditors, and others assess the amounts, timing, and uncertainty of prospective net cash inflows to the related enterprise.

− Financial reporting should provide information about the economic resources of an enterprise, the claims to those resources (obligations of the enterprise to transfer resources to other entities and owners’ equity), and the effects of transactions, events, and circumstances that change its resources and claims to those resources.

6. “Investors” and “creditors” are used broadly and include not only those who have or contemplate having a claim to enterprise resources but also those who advise or represent them.

7. Although investment and credit decisions reflect investors’ and creditors’ expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance.

8. The primary focus of financial reporting is information about earnings and its components.

9. Information about enterprise earnings based on accrual accounting generally provides a better indication of an enterprise’s present and continuing ability to generate favorable cash flows than information limited to the financial effects of cash receipts and payments.

10. Financial reporting is expected to provide information about an enterprise’s financial performance during a period and about how management of an enterprise has discharged its stewardship responsibility to owners.

11. Financial accounting is not designed to measure directly the value of a business enterprise, but the information it provides may be helpful to those who wish to estimate its value.

12. Investors, creditors, and others may use reported earnings and information about the elements of financial statements in various ways to assess the prospects for cash flows. They may wish, for example, to evaluate management’s performance, estimate “earning power,” predict future earnings, assess risk, or to confirm, change, or reject earlier predictions or assessments. Although financial reporting should provide basic information to aid them, they do their own evaluating, estimating, predicting, assessing, confirming, changing, or rejecting.

13. Management knows more about the enterprise and its affairs than investors, creditors, or other “outsiders” and accordingly can often increase the usefulness of financial information by identifying certain events and circumstances and explaining their financial effects on the enterprise.