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Monday, January 11, 2010

The Objective of Financial Statements

The main points rose here as follows
  • The objective of financial statements is to provide information about the financial position, performance and financial adaptability of an enterprise that is useful to a wide range of users for assessing the stewardship of management and for making economic decisions.
  • It is acknowledge that while all not all the information needs of users can be met by financial statements, there are needs that are common to all users. Financial statements that meet the needs of providers of risk capital to the enterprise will also meet most of the needs of other users that financial statements can satisfy.

Users of financial statements other than investors include the following.

  1. Employees
  2. Lenders
  3. Suppliers and other creditors
  4. Customers
  5. Government and their agencies
  6. The public

The limitations of financial statements are emphasized as well as the strengths.

All of the components of financial statements (balance sheet, profit and loss account, cash flow statement) are interrelated because they reflect different aspects of the same transactions.

The exposure draft emphases the ways financial statements provide information about the financial position of an enterprise. The main elements which affect the position of the company are:

  1. The economic resources it controls
  2. Its financial structure
  3. Its liquidity and solvency
  4. Its capacity to adapt to changes in the environment in which it operates (called financial adaptability)

The exposure draft discusses the importance of each of these elements and how they are disclosed in the financial statements.


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