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What is the primary objective of financial reporting?

Short Answer

Expert verified

The primary objective of financial reporting is to provide useful information, track cash flows and deal with liabilities.

Step by step solution

01

Definition of Financial Reporting

Financial reporting is the crucial process of providing key information regarding the financial activities and performance of the business over a specified period, mostly on a quarterly or yearly basis.

The key financial reporting objectives are tracking cash flows, evaluating assets and liabilities, analyzing shareholder’s equity, and measuring profits.

02

Primary objectives of financial reporting

There are three primary objectives of financial reporting. They are:

· Financial reporting helps the users of accounting information by providing information that is beneficial to them in making investment and credit-related decisions.

· It also helps the investors, creditors, and other users find the amount, timing, and uncertainty of future cash flows.

· Financial reporting also helps in knowing about the firm’s economic resources, claims, and changes in those claims to resources.

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Most popular questions from this chapter

Homer Winslow and Jane Alexander are discussing various aspects of the FASB’s concepts statement on the objective of financial reporting. Homer indicates that this pronouncement provides little, if any, guidance to the practicing professional in resolving accounting controversies. He believes that the statement provides such broad guidelines that it would be impossible to apply the objective to present-day reporting problems. Jane concedes this point but indicates that the objective is still needed to provide a starting point for the FASB in helping to improve financial reporting.Instructions

  1. Indicate the basic objective established in the conceptual framework.
  2. What do you think is the meaning of Jane’s statement that the FASB needs a starting point to resolve accounting controversies?

GROUPWORK (Accounting Principles and Assumptions—Comprehensive) Presented below are a number of business transactions that occurred during the current year for Gonzales, Inc.

Instructions

In each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles.

(a) The president of Gonzales, Inc. used his expense account to purchase a new Suburban solely for personal use. The following journal entry was made.Miscellaneous Expense 29,000Cash 29,000

(b) Merchandise inventory that cost \(620,000 is reported on the balance sheet at \)690,000, the expected selling price less estimated selling costs. The following entry was made to record this increase in value.Inventory 70,000Sales Revenue 70,000

(c) The company is being sued for \(500,000 by a customer who claims damages for personal injury apparently caused by a defective product. Company attorneys feel extremely confident that the company will have no liability for damages resulting from the situation. Nevertheless, the company decides to make the following entry.Loss from Lawsuit 500,000Liability for lawsuit 500,000

(d) Because the general level of prices increased during the current year, Gonzales, Inc. determined that there was a \)16,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. The following entryDepreciation Expense 16,000Accumulated Depreciation Equipment 16,000

(e) Gonzales, Inc. has been concerned about whether intangible assets could generate cash in case of liquidation. As a consequence, goodwill arising from a purchase transaction during the current year and recorded at \(800,000 was written off as follows.

(f) Because of a “fire sale.” equipment obviously worth \)200,000 was acquired at a cost of $155,000. The following entry was made.Equipment 2000Cash 155,000Sales Revenue 45,000

Why is it necessary to develop a definitional framework for the basic elements of accounting?

Briefly describe how the organization of the FASB Codification corresponds to the elements of financial statements.

What are the five steps used to determine the proper time to recognize revenue?

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