Objectives of Financial Statements

The principles provided by financial reporting standards facilitate the preparation of financial reports which users of financial statements rely on to make informed decisions.

The financial reporting framework describes the objectives of financial reporting. Besides, it describes the elements and characteristics of financial reports as well as the underlying reporting assumptions and constraints. By being aware of this framework, users of financial reports are empowered to conduct security valuation and other financial analyses.

The primary objective of the entity sharing financial statements is to provide financial information which users of the financial statements (existing and potential investors, creditors, employees, customers, etc.) can premise their decision in regard to whether or not to provide resources to the entity. These decisions may involve buying, holding, or selling the entity’s equity and debt instruments, and providing credit to or settling loans with the entity.

Importance of Financial Reporting Standards in Security Analysis and Valuation

Policy choices and estimates are essential for financial reporting. This calls for some amount of judgment which tends to vary from one drafter of financial reports to another. Financial reporting standards are therefore needed to increase the level of consistency in these judgments. These standards facilitate the comparison of the financial information of a  company with those of other companies (in the same industry and environment) over a stretch of time. The standards are also flexible enough to recognize that differences exist in the underlying economics between businesses. It is equally noteworthy that the standards also appreciate the attendant similarieties among businesses.

In the end,financial reports that comply with all the steps and are properly drafted, provide important insights and highlights insorfar as the valuation of a company and/or its securities are concerned. Indeed, finacial reports are very instrumental in the assessment of a company’s financial performance.

Question

Which of the following statements is least likely accurate?

1. Financial reports provide key inputs into company valuation and security analysis.
2. Financial reporting standards do not allow for comparison of financial information among companies.
3. The general objective of financial statements is to provide information that can be used to make decisions in regard to whether or not to provide resources to the reporting entity.

Solution

The correct answer is B.

Financial reporting standards facilitate the comparison of financial information aamong companies.

Options A and C provide accurate statements.