CA1-5 (Objective of Financial Reporting) SOLUTION

CA1-5
(Objective of Financial Reporting) Karen Sepan, a recent graduate of the local state university, is
presently employed by a large manufacturing company. She has been asked by Jose Martinez, controller, to
prepare the company’s response to a current Preliminary Views published by the Financial Accounting
Standards Board (FASB). Sepan knows that the FASB has a conceptual framework, and she believes that
these concept statements could be used to support the company’s response to the Preliminary Views. She has prepared a rough draft of the response citing the objective of financial reporting.
Instructions
(a) Identify the objective of financial reporting.
(b) Describe the level of sophistication expected of the users of financial information by the objective of financial reporting.

Solution

a) In accordance with Statement of Financial Accounting Contept No 1, "Objectives of financial reporting by business Enterprises," the objectives of financial reporting are to provide information to investors, creditors and others

1. that is useful to present and potential investors and creditors and other users in making ratonal 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. to help present and potential investors and creditors and other users in assessing the amounts, timing and uncertainty of prospective cash receipts from dividends or interest and the poceeds 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. about 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, event and circumstances that change its resources and claims to those resources.

b) Statement of Financial Accounting Concepts No. 1 established standards to meet the information needs of large group of external users such as investors, creditors and their representatives. Although the level of sophistication related to business and financial accounting matters varies both within and between these user groups, users are expected to possess a reasonable understanding of accounting concepts, financial statements and business and economic activities and are expected to be willing to study and interpret the information with reasonable diligence.