Objectives of Financial Reporting For each of the following independent situatio

Question

Objectives of Financial Reporting For each of the following independent situations, the company could be overlooking Discuss each of these objectives 1. The president of Daughters, Inc belileves that the financial statements should be prepared for 1-3 identify the relevant objective(s) of financial t xercise management only, because they are the primary decision makers. and cash position of the firm and should not provide any future-oriented data. current-year revenues and expenses, not to disclose assets, liabilities, and owners' equity Tile Co. believes that financial statements should reflect only the present financial sta 3. The vice president of Greed Enterprises, Inc. believes that the financial statements are to present only 4 Lohan Co. has a policy of providing disclosures of only its assets, liabilities, and owners' equity 5. Bob Building, Inc. always discloses the assets, iabilities, and owners' equity of the firm along with the revenues and expenses. Bob's management belleves that these items provide all of the information relevant to investing decisions. xercise 1-4 For each situation listed, indicate by letter the appropriate qualitative characteristicts) or accounting conceptís) applied. A letter may be used more than once, and more than one characteristic or concept may apply to a particular situation. 1. Goodwill is recorded in the accounts only when it arises from the purchase of another entity at a price higher than the fair value of the purchased entity's identifiable assets Land is valued at cost All payments out of petty cash are debited to Miscellaneous Expense. 2. 3. A. Plant assets are classfied separately as land or buildings, with an accumulated depreciation account 5. Periodic payments of $2.300 per month for services of R. Robertson, who is the sole proprietor of for buildings 6. 7. 8. the company, are reported as withdrawals. Small tools used by a large manufacturing firm are recorded as expenses when purchased. Investments in equity securities are initially recorded at cost. A retail store estimates inventory rather than taking a complete physical count for purposes of preparing monthly financial statements 9. A note describing the company's possible liability in a lawsuit is included with the financial 10. Depreciation on plant assetsis consistently computed each year by the straight-line method. even though no formal liability exists at the balance sheet date. (b) Verifiability (c) Timeliness (d) Faithful representation (e) Neutrality (1) Relevance (g) Going concern (h) Economic entity (1) Historical cost Measurability k) Materiality ) Comparability

Explanation / Answer

Objectives of Finanial Reporting:
1. Financial statements should be prepared not only for management use but also for owners use, investors use and lendors use. Because these are the people who invest money and expect cashflows for their investments. So even manages pays the role of decision makers financial statements should be in accordance with other users requirements.
2. As we all know, The concept of Going concern. Business will start not to close in the year of inception, business will be continued for a forseeable future. Therefore the information presented in financial statements shoul not represent only information relating to current year but also about future years.
3. Financial statements means combination of Balance sheet, Profit and Loss A/c, Cash flow statement and notes to accounts. So, the intention believed by the vice president of greed enterprises is wrong.
4.We have to disclose not only Liabilities, assets and owners equity but also cash flows, investing activities, Profit earned or loss incurred to be more transparent and provide all the information to the stake holders
5. An investor makes the investing decisions based on various considerations. He may require informations relating to assets, liabilities, owners equity, revenue and expenses besides he also need information about profits earned, earnings per share, Liquidity position, consistency in business achievements etc.., so all these matters may be required by an investor to invest in a company.
Application of Accounting characters and concepts:
1. Faithful presentation
2. Historical cost
3. Mateiality
4. Relevance
5. Relevance
6. Materiality
7. Measurability
8. Timeliness
9. Relevance
10. Faithful representation

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