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Home portfolios The Objectives of Financial Reporting

The Objectives of Financial Reporting

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Running Head: The Objectives of Financial Reporting The Objectives of Financial Reporting [Name of Writer] [Name of Institution] FASB The Objectives of Financial Reporting Answers to the specific questions are given below: Q#1 Interest of potential users Many groups have valid interests in analyzing the information provided by financial reporting. These could vary from investors, stock-brokers, employee unions, company directors, suppliers, creditors, management, customers, financial advisers, regulatory authorities, trade associations, financial press and media. While owners, creditors and employees have direct interest in the particular business, the managers and directors, who have the responsibility of running the enterprise also, are directly interested in knowing the concerned information. However, regulatory authorities and financial advisers, media have indirect interest in the information, although they also are potential users of the specific financial information. Hence, the difference in identifying the potential users of financial information would relate to the users’ interests in the business. Those users, who are involved in day to day running of the business, along with the future planning and prospects of the enterprise will be potential users of such information, having direct interest in the firm, while indirect interest holders would be those groups who do not intend to derive any direct benefits from the company, like trade unions, financial analysts, among others. Q#2 Interests of potential users of financial information Those investors and users of potential information, who have direct interests in the affairs of the company, are interested in knowing its cash flow situation, as they need to know about the generation of cash flows, its timing and amount. This is due to the fact that the business enterprise is seen by such potential users as the source of cash generation, which could result in dividend and interest payments, loan repayments, appreciated stock prices and upward revision in the wages of company workers. The investors in a particular business expect handsome returns. Therefore, they are interested in knowing the company’s financial information. For managers and directors, the information regarding cash flow generation would lead them to a better understanding of their contribution towards the same. Q#3 Reasons for FASB identifying specific groups While financial reporting has two aspects, internal and external, FASB statement has identified the internal group of potential users, who are interested in such information. As management has been identified as playing a major role in the use of financial information by external and internal users, it is responsible for passing the information to external agencies for their particular use. In addition, management is directly interested in the information about liabilities, assets and earnings of the company. However, the information provided for creditors and investors can be used by members of other groups, which include the external users, who are interested to know the financial information regarding the particular enterprise, for their own analysis. Q#4 Developing foundational knowledge about financial reporting The financial information is a tool, for analyzing the prospects of any business enterprise. However, it is up to the user to use it properly or misuse the same. Hence, having fundamental knowledge about financial aspects of any business is essential for the potential users to analyze the different aspects of same in a manner, which can provide the desired results. For example, information regarding cash flow generation can be used gainfully, if the potential user has the knowledge about different financial ratios of the relevant enterprise, while they should be able to compare the same with the ratios prevailing in the concerned industry.(Statement of Financial Accounting Concepts No. 1, para 23-28) WORKS-CITED Statement of Financial Accounting Concepts No. 1, “Objectives of Financial Reporting by Business Enterprises”, retrieved on 20th Oct 2010, from: http://www.academia-research.com/filecache/instr/b/l/468242_blobserver.pdf