Objective of Financial Reporting

ADS Objective of Financial Reporting
The objective of general purpose financial reporting is to provide financial information about companies that is useful to capital providers in making decisions. For example, investors decide whether to buy, sell, or hold equity or debt securities, and creditors decide whether to provide or settle loans. 35 Information that is useful to capital providers may also be useful to other users of financial reporting information, such as regulators or taxing authorities. Both investors and creditors are directly interested in the amount, timing, and uncertainty of a company’s future cash flows. Information about a company’s economic resources (assets) and claims against resources (liabilities) also is useful. Not only does this information about resources and claims provide insight into future cash flows, it also helps decision makers identify the company’s financial strengths and weaknesses and assess liquidity and solvency

Qualitative Characteristics of Financial Reporting Information
What characteristics should information have to best meet the objective of financial reporting? Illustration 1–10 indicates the desirable qualitative characteristics of financial reporting information, presented in the form of a hierarchy of their perceived importance. Notice that these characteristics are intended to enhance the decision usefulness of information.

Fundamental Qualitative Characteristics
For financial information to be useful, it should possess the fundamental decision-specific qualities of relevance and faithful representation . Both are critical. Information is of little value if it’s not relevant. And even if information is relevant, it is not as useful if it doesn’t faithfully represent the economic phenomenon it purports to represent. Let’s look closer at each of these two qualitative characteristics, including the components that make those characteristics desirable. We also consider other characteristics that enhance usefulness.

FAITHFUL REPRESENTATION.
 Faithful representation exists when there is agreement  between a measure or description and the phenomenon it purports to represent. For example, assume that the term inventory in the balance sheet of a retail company is understood by external users to represent items that are intended for sale in the ordinary course of business. If inventory includes, say, machines used to produce inventory, then it lacks faithful representation. ADS