Financial Reporting for Companies: 7 Objectives to Keep in Mind during Preparation and Audit of Financial Statements

Financial Statements of a company include Balance Sheet, P&L Account, Cash Flow Statement and Statement of Changes in Equity (SOCIE) with Notes to Accounts
Financial Reporting - Preparation - Audit - Financial Statements - taxscan

Financial statements provide the exact and lucid mirror image of the financial state of a company, firm or enterprise in business finance.

Financial statements, including Balance Sheet, Profit and Loss Account and Cash Flow Statement report the performance of the economic state of an enterprise for a business’s stakeholders and investors.

It includes:

a) Financial Statements – Balance Sheet, Profit and Loss Account, and Cash Flow Statement; anAD

b) also other means of communicating information that relates directly or indirectly to the information provided by the accounting system—that is to say, information about an enterprise’s resources, obligations, earnings, etc.

Corporate Annual Reports, Prospectuses, Interim Financial Reports etc. furnished to Stock Exchanges, and any other report published in pursuance of SEBI Guidelines etc. are instances of Financial Reports. Financial Reporting is not an end in itself but is intended to provide useful information in making business and economic decisions.

The following are seven underlying objectives in preparing and auditing financial statements: Objectives of Financial Reporting The American Financial Accounting Standards Board (FASB) has enunciated a Statement of Financial Accounting Concepts (SFAC 1), Objectives of Financial Reporting by business enterprises.

Read More: Company Balance Sheet and Profit & Loss Account –

The seven objectives stated in SFAC-1 are:

1. Investment and Credit decisions: Financial Reporting must provide useful information to present and potential investors, creditors, and other users in making rational investment, credit, and similar decisions. Financial Reporting must provide information that would have been useful for professionals and also nonprofessionals.

2. Assessment of cash flow prospects: It is, therefore, important to investors, creditors, and others concerned whether the amount of, the timing of, and the relative certainty that can be attached to the cash flow prospects associated with dividends or interest received and the proceeds from the sale, redemption, or maturity of securities or loans, respectively, are considered appropriate. Cash Flows Prospects The ability of the Firm to generate adequate cash flows to meet the enterprise’s obligations and finance its interest and dividends and expansion proposals.

3. Enterprise’s Resources, Claims to those resources, and Changes in the Information above provides a base for the different user groups to evaluate information about the Firm’s performance during a period. It also communicates directly the indication or potential that some resources may have in filling in for cash flow and the cash that may be required to satisfy all or a part of the obligations.

4. Performance and earnings of the enterprise: Reported earnings and information about components of earnings are used by investors, creditors, and others to (a) estimate the performance of management, (b) estimate the earning power or other amounts they perceive as “representative” of long-term earning ability of an enterprise, (c) predict future earnings, and (d) assess the risk of investing in or lending to an enterprise.

5. Liquidity and Solvency: The cash and cash flow, earnings, economic resources, obligations, owners’ equity, etc. constitute the input of information to evaluate the (a) liquidity, i.e., short-term obligations, and (b) solvency, i.e., long- term obligations. Relevant information to do such assessment of liquidity and solvency should be contained in the Financial Reporting.

6. Management Stewardship and Performance Management of an enterprise is responsible to owners for custody of the enterprise’s resources and safeguarding them for their practical and profitable utilisation. Financial reporting should provide information that the management of an enterprise has been responsible for the utilisation of the enterprise’s resources entrusted to the use of the owners.

7. Explanation and Interpretation by the Management: Financial accounting reports are usually prepared such that they can be put to use by the management. The enterprise is typically a group of people within an entity who know best what the enterprise has been up to. They could often improve the value of the financial information by identifying some transactions, events, or conditions that affect the enterprise and explaining their impact on the enterprise.

Financial Reporting, thus, should also be prepared with its explanations and interpretations to help relevantly the users understand the financial information. Management is also expected to add reasons for the adverse qualification/remark in the auditor’s report.

Preparation and audit of financial statements are a susceptible area and, hence, it demands much attention with high standards of doing.

Financial reporting is to be made reliable for all through ensuring assurance of the achievement of these seven objectives: accuracy and completeness, transparency and clarity, compliance with the regulatory standard, fair representation, timeliness, audibility with verification, and consistency.

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