Demonstrate your ability to explain the objective of financial reporting and to

Question

Demonstrate your ability to explain the objective of financial reporting and to apply the definitions of financial statement elements to identify events and transactions that businesses recognize in their accounting information systems. Limit the length of your response to each subpart to a maximum of 50 words. Spell-check and grammar-and-style-check your completed response using MS Word’s tool for this purpose, being sure to correct any matters identified by these checking tools.

Situation

The FASB has described the objective of financial reporting and financial statements as providing information:

1. Useful for making investment and credit decisions;

2. Useful in assessing the future cash flows to a business and its investors and creditors; and

3. About a business’ economic resources, equity and liability claims to those resources, and changes in those resources

First, state which of the basic financial statements – balance sheet, income statement, statement of cash flows, and statement of changes in stockholders’ equity – appears to respond most directly to each of the above elements of the financial reporting objective. Then, explain how you might use each such statement to achieve the related objective element (you may you use illustrative examples for this purpose).

Situation

The FASB has described the objective of financial reporting and financial statements as providing information:

1. Useful for making investment and credit decisions;

2. Useful in assessing the future cash flows to a business and its investors and creditors; and

3. About a business’ economic resources, equity and liability claims to those resources, and changes in those resources

First, state which of the basic financial statements – balance sheet, income statement, statement of cash flows, and statement of changes in stockholders’ equity – appears to respond most directly to each of the above elements of the financial reporting objective. Then, explain how you might use each such statement to achieve the related objective element (you may you use illustrative examples for this purpose).

Explanation / Answer

1. Useful for making investment and credit decisions

Balance Sheet and Income Statement

Financial reporting is directed towards the interests of various external users but the most prominent users are Investors and Creditors. They are the one who need the infomation the most and has no authority at all over prescribe the information they want. Their needs has been studied carefully and after that financial reporting framework is prepared so that the numbers should not be vague or highly abstract. This is necessary because the investors and creditors decision affect the allocation of resources.

2. Useful in assessing the future cash flows to a business and its investors and creditors

Cash Flow Statement, Income Statement, Balance Sheet

Financial Reporting Framework has been designed in a way that a gives a idea to the investors and creditors about the future cash flows of the entity. There are many such ways like comparing last year's datas, comparing the entity data with industry's data, performing financial analysis, etc. Investors and creditors want to know about the resources of the entity, assets, cash flows, etc to identify the ability of the entity to repay the principles and interest.

3. About a business’ economic resources, equity and liability claims to those resources, and changes in those resources

Balance Sheet

Investors and creditors estimates from the balance sheet about the economic resources, equity and liability claims to those resources, and changes in those to find out that whether there capital or investment is entacted in the business or it is being drain out. They value the resources according to their professional judgement and on the basis of the financial statements and for their decision.

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