Question

(GAAP and Standard-Setting) Presented below are four statements which you are to identify as true or false. If false, explain why the statement is false.

1. The objective of financial statements emphasizes a stewardship approach for reporting financial information.
2. The purpose of the objective of financial reporting is to prepare a balance sheet, an income statement, a statement of cash flows, and a statement of owners’ or stockholders’ equity.
3. Because they are generally shorter, FASB interpretations are subject to less due process compared to FASB standards.
4. The objective of financial reporting uses an entity rather than a proprietary approach in determining what information to report.

Short answer

1. false.
2. false.
3. false.
4. true.

Step-by-step solution

Meaning of financial statements

Financial statements of a business are the statements used as a medium for decision-making by the management as well as by the outsiders such as shareholders and investors, financiers and creditors, government authorities, and so on. Its basic purpose is to make rational investment, credit, and other related financial decisions and to compute future cash flow and conduct bankruptcy risk assessment.

Explanation for statement ‘1’

The statement is false. This is because besides supplying beneficial information about the future cash flows necessary for decision making, the management is also responsible for safeguarding the company’s financial resources and for their effective and productive use; however, this is not regarded as objective.

Explanation for statement ‘2’

The statement is false. This is because the purpose of financial reporting is to give accounting information about the reporting organization that is beneficial to existing and potential equity investors, creditors, as well as lenders in making decisions in their ability as capital suppliers.

Explanation for statement ‘3’

The statement is false. The reason behind this is the Financial Accounting Standards Board (FASB) adheres to a similar due process method for standards and interpretations.

Explanation for the statement ‘4’

The statement is true. This is because under the proprietary aspect, the purpose of general-purpose financial reporting is to supply financial information about the owner’s business to the owner, which implies that the reporting organization is presumed to have no substance distinct from that of its owners.