Objectives
Financial
reporting objectives are broad overriding goals sought by accountants engaging in financial
reporting.
reporting objectives are broad overriding goals sought by accountants engaging in financial
reporting.
The first
objective financial reporting is to provide information that is useful to
present and potential investors and creditors and other users in making
rational investment, credit and similar decisions.
objective financial reporting is to provide information that is useful to
present and potential investors and creditors and other users in making
rational investment, credit and similar decisions.
The
information should be comprehensive to those who have a reasonable
understanding of business and economic activities and are willing to study the
information with reasonable diligence.
information should be comprehensive to those who have a reasonable
understanding of business and economic activities and are willing to study the
information with reasonable diligence.
The term
other users is interpreted broadly and includes employees, security analysis,
brokers, and lawyers. Financial reporting should provide information to all who
are willing to use it properly.
other users is interpreted broadly and includes employees, security analysis,
brokers, and lawyers. Financial reporting should provide information to all who
are willing to use it properly.
The
second objective of financial reporting is to provide information to help
present and potential investors creditors and other users in assessing the
amounts, timing, and uncertainty of prospective cash receipts from dividends or
interest and the proceeds from the sale, redemption, or maturity of securities or
loans. Since investors and creditors cash flows are related to enterprise cash
flows, financial reporting should provide information to help investors,
creditors, and others assess the amounts, timing, and uncertainty of
prospective net cash inflows to the related enterprise.
second objective of financial reporting is to provide information to help
present and potential investors creditors and other users in assessing the
amounts, timing, and uncertainty of prospective cash receipts from dividends or
interest and the proceeds from the sale, redemption, or maturity of securities or
loans. Since investors and creditors cash flows are related to enterprise cash
flows, financial reporting should provide information to help investors,
creditors, and others assess the amounts, timing, and uncertainty of
prospective net cash inflows to the related enterprise.
This
objective ties cash flows of investors (owners) and creditors to the cash flows
of the enterprise a tie-in that appears entity logical. Enterprise cash inflows
are the source of cash dividends (owner withdrawals), interest, and redemption
of maturing debt.
objective ties cash flows of investors (owners) and creditors to the cash flows
of the enterprise a tie-in that appears entity logical. Enterprise cash inflows
are the source of cash dividends (owner withdrawals), interest, and redemption
of maturing debt.
Thirdly,
financial reporting should provide information about the economic resources of
an organization or enterprise, the claims to these resources (obligations) of
the enterprise to transfer resources to other entities and ownership equity and
effects of transactions, and circumstances that changes its resources and
claims to those resources.
financial reporting should provide information about the economic resources of
an organization or enterprise, the claims to these resources (obligations) of
the enterprise to transfer resources to other entities and ownership equity and
effects of transactions, and circumstances that changes its resources and
claims to those resources.
A number
of conclusions can be drawn from these objectives and from a study of the
environment in which financial reporting is carried out. For example, financial
reporting should:
of conclusions can be drawn from these objectives and from a study of the
environment in which financial reporting is carried out. For example, financial
reporting should:
1. Provide information about an enterprise
past performance because such information is used as a basis for prediction of
future enterprise performance.
past performance because such information is used as a basis for prediction of
future enterprise performance.
2. Focus on earning and its components
despite the emphasis in the objectives on cash flows. Earning computed under
the accrual basis provide a better indicator of ability to generate favourable
cash flows than do statements prepared under the cash basis. On the other hand,
financial reporting does not seek to :
despite the emphasis in the objectives on cash flows. Earning computed under
the accrual basis provide a better indicator of ability to generate favourable
cash flows than do statements prepared under the cash basis. On the other hand,
financial reporting does not seek to :
(a) Measure the value of an enterprise but
rather provides information that may be useful in determining it value.
rather provides information that may be useful in determining it value.
(b) Evaluation management’s performance,
predict earning power but rather provide information to persons who wish to
make these evaluations.
predict earning power but rather provide information to persons who wish to
make these evaluations.
Principles
Financial
reporting does not rest on one generally accept theory of accounting. Rather
financial accounting decisions reflect a number of basis conventions which are
more or less commonly accepted as useful guides to selecting appropriate
accounting policies.
reporting does not rest on one generally accept theory of accounting. Rather
financial accounting decisions reflect a number of basis conventions which are
more or less commonly accepted as useful guides to selecting appropriate
accounting policies.
These
conventions have grown out of the experiences of accountants and business
executive in trying to measure and communicate the result of operations and
financial condition of business organizations.
conventions have grown out of the experiences of accountants and business
executive in trying to measure and communicate the result of operations and
financial condition of business organizations.
In practice accounting convention seen to be
utilitarian. Their degree of acceptance stems from their usefulness to those
making decisions involving accounting data. This usefulness is determined in
term by the convention congruence with the social and economic conditions,
needs and concepts of time, clearly, as these factor change over time, so must
accounting conventions.
utilitarian. Their degree of acceptance stems from their usefulness to those
making decisions involving accounting data. This usefulness is determined in
term by the convention congruence with the social and economic conditions,
needs and concepts of time, clearly, as these factor change over time, so must
accounting conventions.
The
following are a number of basic principles. Some may argue certain conventions
should be combined and or dropped, others might try to break the list into
categories which distinguish between postulate and principles.
following are a number of basic principles. Some may argue certain conventions
should be combined and or dropped, others might try to break the list into
categories which distinguish between postulate and principles.
The
purpose of this is simple to cover the basic principles or conventions that
seem to be accepted to some degree that are included in a number of the
outstanding accounting books and statement of accounting’s basic concepts.
purpose of this is simple to cover the basic principles or conventions that
seem to be accepted to some degree that are included in a number of the
outstanding accounting books and statement of accounting’s basic concepts.
Business entity
The
business entity principles is that financial statement are for a business
entity which is separate and distinct from it owners. What happens to its
owners affairs is irrelevant.
business entity principles is that financial statement are for a business
entity which is separate and distinct from it owners. What happens to its
owners affairs is irrelevant.
The
principal reason for this principle is that it defines the area of interest of
the accountant ant sets the limits on the possible objectives and contents of
financial reports.
principal reason for this principle is that it defines the area of interest of
the accountant ant sets the limits on the possible objectives and contents of
financial reports.
Consequently,
the analysis of business transactions involving costs and revenue is expressed
in terms of the changes in the firms’ financial condition. Similarly, the
assets liabilities devoted to business activities are entity assets and
liabilities.
the analysis of business transactions involving costs and revenue is expressed
in terms of the changes in the firms’ financial condition. Similarly, the
assets liabilities devoted to business activities are entity assets and
liabilities.
Going concern
Unless
evidence suggest otherwise, those preparing accounting statements for a
business entity assume it will continue operations into the foreseeable future.
evidence suggest otherwise, those preparing accounting statements for a
business entity assume it will continue operations into the foreseeable future.
Accounting
emphasizes and reflects the continuing nature of business activity. For example
the accountant expects that the company in the normal course of business will
receive then full value of most of its accounts receivable.
emphasizes and reflects the continuing nature of business activity. For example
the accountant expects that the company in the normal course of business will
receive then full value of most of its accounts receivable.
Accordingly,
the accountant records these items at their face value, less some as assets,
since the accountant assumes the inventories will be disposed of later in the
normal course of operations. However, the continuity assumption does not imply
that the future will be the same as the past.
the accountant records these items at their face value, less some as assets,
since the accountant assumes the inventories will be disposed of later in the
normal course of operations. However, the continuity assumption does not imply
that the future will be the same as the past.
Monetary
Accounting
is a measurement process dealing only with those events which can be measured
in monetary terms. This principle reflects the fact that money is the common
denominator used business to measure the exchangeability of goods, services,
and capital.
is a measurement process dealing only with those events which can be measured
in monetary terms. This principle reflects the fact that money is the common
denominator used business to measure the exchangeability of goods, services,
and capital.
Obviously,
financial statements should indicate the money unit used.
financial statements should indicate the money unit used.
Accounting period
For
decision making purpose, management and investors need period “test readings”
of the progress of their business. Accounting recognizes this need and breaks
the flow of business activity into a series of reporting or fiscal period.
These periods are usually 12 months in length. Most companies issues interim
statements in form of quarterly or semi annual statements to shareholders. For
management use; statements covering shorter periods such as a month, or week
may be prepared.
decision making purpose, management and investors need period “test readings”
of the progress of their business. Accounting recognizes this need and breaks
the flow of business activity into a series of reporting or fiscal period.
These periods are usually 12 months in length. Most companies issues interim
statements in form of quarterly or semi annual statements to shareholders. For
management use; statements covering shorter periods such as a month, or week
may be prepared.
Irrespective
of the length of the period, the statements must indicate the period covered.
of the length of the period, the statements must indicate the period covered.
Consistency
The
consistency principles require that similar transactions be reported in a
consistent fashion from period to period. For example, comparison of
inter-period result would be difficult if a company changed it’s depreciation
policy each year. Changing circumstances.
consistency principles require that similar transactions be reported in a
consistent fashion from period to period. For example, comparison of
inter-period result would be difficult if a company changed it’s depreciation
policy each year. Changing circumstances.
Accountants
place considerable emphasis on consistency. When expressing an audit opinion,
the accountant notes whether or not the statements were prepared “on a basis
consistent with that of the preceding year” if changes were made, he notes
these in his opinion and insists that the nature impact of these changes be
fully disclosed.
place considerable emphasis on consistency. When expressing an audit opinion,
the accountant notes whether or not the statements were prepared “on a basis
consistent with that of the preceding year” if changes were made, he notes
these in his opinion and insists that the nature impact of these changes be
fully disclosed.
Historical cost
For
accounting purpose, business transaction are normally measured in terms of the
actual prices or cost at the time the transaction was consummated. This
principle applies to both the initial recording and subsequent reporting of
transactions. While agreeing with the need to record historical costs
initially, some influential accountants argue accounting would be “more useful”
if estimates of current and future values were substituted for historical costs
under certain conditions. The extent to which cost and value should be
reflected in the accounts is central to much of the current accounting
controversy.
accounting purpose, business transaction are normally measured in terms of the
actual prices or cost at the time the transaction was consummated. This
principle applies to both the initial recording and subsequent reporting of
transactions. While agreeing with the need to record historical costs
initially, some influential accountants argue accounting would be “more useful”
if estimates of current and future values were substituted for historical costs
under certain conditions. The extent to which cost and value should be
reflected in the accounts is central to much of the current accounting
controversy.
Realization
For
accounting purpose, revenue is realized during the period either when services
or goods are exchanged for a valuable consideration or when the amount of
revenue can be verified with reasonable degree of objectivity.
accounting purpose, revenue is realized during the period either when services
or goods are exchanged for a valuable consideration or when the amount of
revenue can be verified with reasonable degree of objectivity.
In
practice, no one test, such as sale or delivery, has proven satisfactory given
the diversity of industry’s production, sale and credit practices.
Consequently, the timing of revenue realization ranges from the act of
production, to the receipt of cash. Clearly the application of the realization
concept depends upon the circumstances of each case.
practice, no one test, such as sale or delivery, has proven satisfactory given
the diversity of industry’s production, sale and credit practices.
Consequently, the timing of revenue realization ranges from the act of
production, to the receipt of cash. Clearly the application of the realization
concept depends upon the circumstances of each case.
Materiality
The basis
future of materiality is that financial reporting is only concerned with
information that is significant enough to affect evaluations of decisions.
future of materiality is that financial reporting is only concerned with
information that is significant enough to affect evaluations of decisions.
However,
materiality may be looked upon as a constant determined by the inability of the
specific users to handle users to handle large masses of data. One of the
responsibilities of the account in financial reporting is to summarize this
mass of data in such a way that it will be meaningful to the users of the
reports.
materiality may be looked upon as a constant determined by the inability of the
specific users to handle users to handle large masses of data. One of the
responsibilities of the account in financial reporting is to summarize this
mass of data in such a way that it will be meaningful to the users of the
reports.
Too much
data can be just as misleading as too little. Just as too little information
does not promote good predictions and decisions, information that is replete,
with insignificant details may also detract good prediction and decision
making.
data can be just as misleading as too little. Just as too little information
does not promote good predictions and decisions, information that is replete,
with insignificant details may also detract good prediction and decision
making.
Objective and verifiability
In order
that accounting measurements can be reliable as possible in presenting
information relevant for prediction and decision making of investors and other
users of financial reports, accountants must decide what attribute is being
measured and then select a measurement procedure that is likely to describe
accurately the attribute.
that accounting measurements can be reliable as possible in presenting
information relevant for prediction and decision making of investors and other
users of financial reports, accountants must decide what attribute is being
measured and then select a measurement procedure that is likely to describe
accurately the attribute.
Objectivity has meant different has meant different
things to different writer:
things to different writer:
Several of the meanings are:-
1. Measurements that is impersonal or
existing outside the mind of the person making the measurement. Example
reporting revenue at the time of sale.
existing outside the mind of the person making the measurement. Example
reporting revenue at the time of sale.
2. Absence of subjective valuation and
personal bias.
personal bias.
3. Measurement based on verifiable evidence.
Example revenue is accepted as realized on the basis of sale as evidence.
Example revenue is accepted as realized on the basis of sale as evidence.
4. Measurements based on a consensus of
qualification expect and;
qualification expect and;
5. The narrowness of the statistical
dispersion of the measurements of an attribute when made by different measures.
dispersion of the measurements of an attribute when made by different measures.
Conservatism
The term
“conservatism” is generally used to mean that accountants should report the
lowest of several possible values for assets and revenues and the highest of
several possible values for asset and revenues and highest of several possible
values for liabilities.
“conservatism” is generally used to mean that accountants should report the
lowest of several possible values for assets and revenues and the highest of
several possible values for asset and revenues and highest of several possible
values for liabilities.
It also
implies that expenses should be recognized sooner than later and that revenues
should be recognized later than sooner.
implies that expenses should be recognized sooner than later and that revenues
should be recognized later than sooner.
Therefore,
net assets are more likely to be valued below current exchange prices rather
than above, and the computation of income is likely to result in the lowest of
several alternative amounts. Thus pessimism is assumed to be better than
optimism in financial reporting.
net assets are more likely to be valued below current exchange prices rather
than above, and the computation of income is likely to result in the lowest of
several alternative amounts. Thus pessimism is assumed to be better than
optimism in financial reporting.
One of
the arguments for conservatism is that the tendency toward pessimism is assumed
to be necessary to offset the over optimism of managers and owners.
the arguments for conservatism is that the tendency toward pessimism is assumed
to be necessary to offset the over optimism of managers and owners.
Another
argument for conservatism is that over statement of profit and valuations is
more dangerous for the business and its owners than understatement.
argument for conservatism is that over statement of profit and valuations is
more dangerous for the business and its owners than understatement.
Conclusion
The
primary objective of financial reporting is to provide information with
adequate, fair and full disclosures to enable present and potential investors
creditor, owners, management, government and others interested in these
report’s to make an informed decision on whether to invest in a particular
enterprise or not and to ascertain all relevant information about an
enterprise.
primary objective of financial reporting is to provide information with
adequate, fair and full disclosures to enable present and potential investors
creditor, owners, management, government and others interested in these
report’s to make an informed decision on whether to invest in a particular
enterprise or not and to ascertain all relevant information about an
enterprise.
There are
sharp disagreements on generally accepted principles in financial reporting.
However, some of the principles that have been accepted by many accountants and
writers on financial reporting include the business entity going concern,
monetary, accounting period consistency, historical cost, realization,
materiality, objectivity and verifiability and conservatism.
sharp disagreements on generally accepted principles in financial reporting.
However, some of the principles that have been accepted by many accountants and
writers on financial reporting include the business entity going concern,
monetary, accounting period consistency, historical cost, realization,
materiality, objectivity and verifiability and conservatism.
