To establish a foundation for financial accounting and reporting, the accounting profession identified a set of objectives of financial reporting by business enterprises.
Financial reporting should provide information:
1. 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 comprehensible to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence.
2. That helps present and potential investors, creditors, and other users assess 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.
3. That clearly portrays the economic resources of an enterprise, the claims to those resources (obligations of the enterprise to transfer resources to other entities and owners’ equity), and the effects of transactions, events, and circumstances that change its resources and claims to those resources.
In brief, the objectives of financial reporting are to provide information that is
(1) useful in investment and credit decisions, (2) useful in assessing cash flow prospects, and (3) about company resources, claims to those resources, and changes in them.