OBEDOZA APRIL JOY L.

ACR 2
BSA 4- A

CHAPTER 2
1. Objectives of financial reporting
the objective of financial reporting is “to provide information about the financial
position, performance and changes in financial position of an enterprise that is
useful to a wide range of users in making economic decisions.”

The following points sum up the objectives & purposes of financial reporting –

 Providing information to the management of an organization which is used

for the purpose of planning, analysis, benchmarking and decision making.
 Providing information to investors, promoters, debt provider and creditors
which is used to enable them to male rational and prudent decisions
regarding investment, credit etc.
 Providing information to shareholders & public at large in case of listed
companies about various aspects of an organization.
 Providing information about the economic resources of an organization,
claims to those resources (liabilities & owner’s equity) and how these
resources and claims have undergone change over a period of time.
 Providing information as to how an organization is procuring & using
various resources.
 Providing information to various stakeholders regarding performance
management of an organization as to how diligently & ethically they are
discharging their fiduciary duties & responsibilities.
 Providing information to the statutory auditors which in turn facilitates
audit.
 Enhancing social welfare by looking into the interest of employees, trade
union & Government.

2. Limitations of financial reporting

  Do not and cannot provide all the information that existing and potential
investors, lenders and other creditors need
Those users need to consider pertinent information from other sources, for
example, general economic conditions and expectations, political events
and political climate, and industry and company outlooks.
 Are not designed to show the value of an entity but these reports provide
information to help the primary users estimate the value of the entity
Individual primary users have different, and possibly conflicting, information
needs and desires. The Board, in developing financial reporting standards,
will seek to provide the information set that will meet the needs of the
maximum number of primary users. However, focusing on common
information needs does not prevent the reporting entity from including
additional information that is most useful to a particular subset of primary
users.
 Are intended to provide common information to users and cannot
accommodate every request for information

 Are based on estimates and judgments rather than exact depiction

The Conceptual Framework establishes the concepts that underlie those
estimates, judgments, and models. The concepts are the goal towards which
the Board and preparers of financial reports strive. As with most goals, the
Conceptual Framework’s vision of ideal financial reporting is unlikely to be
achieved in full, at least not in the short term, because it takes time to
understand, accept, and implement new ways of analyzing transactions and
other events. Nevertheless, establishing a goal towards which to strive is
essential if financial reporting is to evolve so as to improve its usefulness.

3. Qualitative characteristics of useful financial information

Fundamental Qualitative characteristics

a. Relevance gives financial information the capability of making a difference in

decisions made by users. Such capability arises when the information has
either predictive value, confirmatory value, or both. Relevance is applicable in
the context of materiality. Materiality is the quality of financial information
which makes its omission or misstatement significant enough to impact the
 decisions that users make through reliance on the information. Materiality
acts as a filter on relevant information such that relevant information is useful
only when it is material.

b. Faithful representation is achieved when financial information truthfully

represents the underlying economics of a phenomena. This is achieved when
information is :

 Complete
 neutral (without any understatement or overstatement bias) and
 free from error (at least in the process used to produce the information).

Enhancing Qualitative characteristics

a. Verifiability
Verifiability helps assure users that information faithfully represents the economic
phenomena it purports to represent. Verifiability means that different knowledgeable
and Independent observers could reach consensus. To help users decide whether
they want to use that information, it would normally be necessary to disclose the
underlying assumptions, the methods of compiling the information and other factors
and circumstances that support the information.

b. Comparability
Comparability is the qualitative characteristic that enables users to identify and
understand similarities in, and differences among, items. Users’ decisions involve
choosing between alternatives, for example, selling or holding an investment, or
investing in one reporting entity or another. Consequently, information about a
reporting entity is more useful if it can be compared with similar information about
other entities and with similar information about the same entity for another period or
another date.

c. Understandability
Classifying, characterizing and presenting information clearly and concisely
makes it understandable.
 d. . Timeliness
Timeliness means having information available to decision-makers in time to be
capable of influencing their decisions. Generally, the older the information is the less
useful it is. However, some information may continue to be timely long after the end
of a reporting period because, for example, some users may need to identify and
assess trends.

4. Elements of financial statements

Elements of Financial Position
a. Asset
are the resources control by the entity as the result of past events and from
which the future economic benefits are expected to flow the entity. In general, assets
are classified into two types, current and non-current asset.
Here are examples of assets:
 Land
 Building
 Property
 Computer equipment
 Cash in bank
 Cash on hand
 Cash advance
 Petty cash
 Inventories
 Account receivables
 Prepaid expenses
 Goodwill
 And other assets that meet the definition of assets above

b. Liability
the present obligations arising from the past events, the settlement of which is
expected to result in an outflow from entity resources embodying economic benefit.
Here are examples of Liabilities in Financial Statements:
 Bank Loan
  Overdraft
 Interest payable
 Tax payable
 Account payable
 Noted payable
 Borrowing from parent company
 Intercompany account payable
 Salary payable

c. Equity
is the residual interest in the assets of the entity after deducting all its liabilities.
For example, if assets are increasing and the liabilities are stable, then equities will
increase. However, if assets are stable and liabilities are increased, the equity will
decrease.
The items that recorded in equity are:
 Share capital
 Retain earning or retain losses
 Revaluation gain
 Dividends payment

Elements of Financial Position

a. Income
is an increase in the economic benefits during the accounting period in the form
of inflows or enhancements of assets or decrease of liabilities that result in increases
in equity, other than those relating to contributions from equity participants.
An example of revenues is sales revenues from selling goods or rendering
services, interest incomes from bank deposits, and a dividend received from equity
investments.
Revenues in the income statement are records altogether for both the revenues
from selling the entity’s main products or services ( principle activities) and revenues
that the entity generates from the entity’s non-activities.
Two accounting principles are used to record and recognize revenues in the
income statement. First, it uses a cash basis, and second, it uses an accrual basis.
b. Expenses
is decreased in economic benefits during the accounting period in the form of
outflows or depreciation of assets or incurred of liabilities that result in decreases in
equity, other than those relating to distributions to equity participants.
Expenses here refer to the expenses that occur for daily operational costs. Those
expenses are:
 Cost of goods sold
 Salaries expenses
 Depreciation
 Interest Expenses
 Tax expenses
 Utility expenses
 Transportation Cost
 Marketing Expenses
 Rental Expenses
 Repair and maintenance
 Internet Fee
 Telephone fee