Chapter 1: Objectives of Financial Reporting

Conceptual Framework and Accounting Standards

 Objective of Financial Reporting

 The overall objective of financial reporting is to provide financial information about
the reporting entity that is useful to existing and potential investors, lenders and other
creditors in making decisions about providing resources to the entity.

 Specific Objectives
 To provide information useful in making decisions about providing resources to
the entity
 To provide information useful in assessing the cash flow prospects of the entity
 To provide information about entity resources, claims, and changes in resources
and claims

 Users of Financial Information

Primary users – parties to whom general purpose financial reports are primarily
directed
 Existing and potential investors – concerned with the
The investors need
risk inherent in and return provided by their
information to help them
investments
determine whether they
 Shareholders – interested in information which
should buy, hold, or sell.
enables them to assess the ability of the entity to pay
dividends
 Existing and potential lenders and other creditors – interested in information
which enables them to determine whether their loans, interest thereon and
other amounts owing to them will be paid when due.

Other users – users of financial information other than

the existing and potential investors, lenders, and other Other users are so called
creditors because they are parties that
 Employees – interested in information about may find the general purpose
the stability and profitability of the entity financial reports useful but
 Customers – have an interest in information the reports are not directed
about the continuance of an entity especially to them primarily
when they have a long-term involvement with or
are dependent on the entity
 Government and its agencies – interested in the allocation of resources and
therefore the activities of the entity
 Public - financial statements may assist the public by providing information
about the trends and recent developments in the prosperity of the entity and
the range of its activities.