Comprehensive Analysis of Financial Reporting: Concepts and Objectives

This report provides a comprehensive overview of financial reporting, focusing on its objectives and the qualitative characteristics that ensure the usefulness of financial information for stakeholders. It explores the fundamental objectives, including investment decision-making, assessing creditworthiness, and management accountability. The report delves into the qualitative characteristics such as relevance, faithful representation, comparability, verifiability, timeliness, and understandability. Furthermore, it explains key accounting concepts and assumptions, including recognition, measurement, disclosure, economic entities, going concern, monetary unit, periodicity, and the accrual basis. The report concludes by emphasizing the importance of accurate financial statements in facilitating sound investment decisions and providing insights into a company's financial performance and position. This report is beneficial for students studying finance as it helps them understand the core principles of financial reporting.

Financial Reporting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY ..................................................................................................................................1
1. Objectives & Qualitative characteristics requires in preparing financial reporting................1
2. Accounting concepts/ assumption used in preparing financial statements.............................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Financial Reporting is a process of preparing or producing reports, accounts or statements
which makes disclosure about the financial position and performance of the business
organization. Disclosure of financial statements is made on company's official website also for
easy access to every stakeholder. This financial reporting thus helps management team,
stakeholders, customers and creditors in decision making process related to investment. The
report will explain the accounting assumptions, concepts used by many business organization in
preparing the financial statements of the company which includes income statement, statement of
cash flows, balance sheet, profit & loss statement and statement of equity. This report will
discuss that how a quality financial information is useful for its stakeholders in allocation of
funds by relying on it.
MAIN BODY
1. Objectives & Qualitative characteristics requires in preparing financial reporting.
Financial reporting involves disclosure of financial position, performance as well as
financial result of the company to its management, stakeholders, customers, creditors. It shows
the procedures, strategies and plans followed by the company in achieving its goals and
objectives. With the help of financial reporting, one can access how a company is performing
over a specific period (Bushee and et.al., 2018).
The basic objectives of preparing financial reporting is as follows:
1. Investment decision making – Since the stakeholders, creditors, customers of company
depends on the financial information of the company for making economic & sound
investment decision by allocating funds in the best investment options for maximizing
returns.
2. Creditworthiness of company – The creditworthiness of business can be determined by
banks, stakeholders and creditors with the help of financial statements prepared for a
specific period. It helps lenders of company in assessing the amount of assets available
with company and the probability of making defaults related to debt payment (Bushee
and et.al., 2018).
1

3. Management accountability – The another main objective of financial reporting is to
assess whether the management of business organization is utilizing the resources
effectively for the smooth functioning of the enterprise.
Fundamental Quality of financial statement emphasizes on factors such as:
1. Relevance: The most important characteristics a financial statement should have is
'Relevant'. It helps users in making predictions related to past, present or future outcomes
from an event. The more the relevant information is, it will create a better understanding
of Predictive and Confirmatory Value. The information provided should be of reliable
nature (Saleh & Alghusain, 2018).
2. Faithful Representation: The report should be neutral in nature i.e. it is free from any
biasses and objective factor. The report presented should be complete, accurate and
updated form time to time with relevant material information. Also, the financial
statement prepared should be Free from Error and mistakes.
3. Enhancing Qualities: The financial statements prepared should have following quality
such as comparability, verifiability, timeliness and understandability.
Comparability characteristic defines that economical decision are made by management of
company on making comparison between financial information on basis of ratios or other tools
used for preparing financial statements (Saleh & Alghusain, 2018).
Verifiability quality emphasizes in providing an assurance that what an accounting
measures represent, is exactly what the company wants to represent to its stakeholders
and other users.
Timeliness is considered as one of the most important characteristic in financial
reporting. Timely availability of financial information to its users helps in gaining
maximum profits by making sound decision related to investment (Saleh & Alghusain,
2018).
Understandability is a significant factor which helps users in understanding the core
meaning of financial statements. The financial reports prepared should be easy to
understood and also avoids the wrong interpretation by users (Saleh & Alghusain, 2018).
2

2. Accounting concepts/ assumption used in preparing financial statements.
Accounting concepts is defined as basic assumptions, rules and principles which are
adopted and followed by company & considered as a basis for the purpose of recording business
transactions and also for preparing financial accounts and reports (Turner, 2018).
Recognition Concept – Also known as Revenue Recognition concept which states that for every
business transaction, revenue should be recognized and recorded whenever it is earned and not
wait until it is actually collected. For example - Payment made in advance for services consumed
(Turner, 2018).
Measurement Concept – This concept emphasizes that only those business transactions which
can be measured into monetary values are recognized in financial statements example – Business
Inventory (Turner, 2018).
Disclosure Concept – This concept states that financial statement should contain all material and
relevant information including both financial & non financial, which can have impact decision
making of users for example – accounting policies followed (Accounting Concepts and
Principles, 2019).
Basic accounting assumptions:
Economic Entities – Also known as Business Entity Concept which defines that all the business
transactions should be recorded separately for company owner and for business itself. Example:
A loan of $10000 taken by business owner is recorded as Business loan on company's liability
side and as loan receivable on owner side (Turner, 2018).
Going Concern – It assumes that business will remain in operation in future period or will
continue to operate for indefinite period or till its objective is accomplished. Example: accrual of
expenses (Accounting Concepts and Principles, 2019).
Monetary unit – Also known as Money Measurement Concept which emphasizes that only those
business transactions which can be measured in monetary terms are recognized in the financial
statements. For example: Employee satisfaction level can not be measured in monetary term so it
is not included in financial statements' preparation (Turner, 2018).
3

Periodicity – This concept is based on assumption that any business transaction occurring in an
accounting period, has to be recorded in the financial statement within the same period of time.
For example: The principle of Revenue recognition and matching concept works on this concept,
as the revenue are recorded and expenses are allocated for specific period.
Accrual Basis - This concept works on assumption that for every business revenue is recognized
only when sale is done and hence revenue is earned and expenses are recognized when they are
incurred. For example – For recording of sales revenue, the expenses incurred in cost of goods
sold is also considered (Turner, 2018).
CONCLUSION
From the above report it can be concluded that the term financial reporting is associated
with preparation of financial statements and communicating such financial reports to its
shareholders, creditors and other stakeholders for making investment decision in economical
manner. These statements and reports helps in making allocation of funds effectively thereby
selecting the best investment option. Further this report has explained that how a company by
using accounting concepts and assumptions in proper manner helps the business organization in
preparation of financial statements containing true, fair, relevant & accurate monetary as well as
non monetary information about the company. From this financial reporting, stakeholders comes
to know about the financial position and performance of company.
4

REFERENCES
Books and Journals
Acharya, V. V., & Ryan, S. G. (2016). Banks’ financial reporting and financial system stability.
Journal of Accounting Research. 54(2). 277-340.
Borker, D. R. (2016). Gauging the Impact of Country-Specific Values on the Acceptability of
Global Management Accounting Principles. European Research Studies. 19(1). 149.
Bushee, B. J., and et.al., (2018). Financial Reporting Quality, Investment Horizon, and
Institutional Investor Trading Strategies. The Accounting Review.
Dunn, L. N. (2018). The Fundamentals of GAAP: Case Studies of Accounting Principles
(Doctoral dissertation, The University of Mississippi).
Marland, E., Domke, and et.al., (2017). Adherence to Accounting Principles. In Understanding
and Analysis: The California Air Resources Board Forest Offset Protocol (pp. 29-36).
Springer, Cham.
Saleh, I., & Alghusain, N. (2018). Disclosure of Financial Statements and Its Effect on
Investor¡¯ s Decision Making in Jordanian Commercial Banks. International Journal of
Economics and Finance. 10(2). 20-27.
Turner, E. (2018). Survey of Accountancy in Generally Accepted Accounting Principles and
Financial Statement Analysis (Doctoral dissertation, University of Mississippi).
Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis. World Scientific Book
Chapters. 109-169.
Online
Financial Reporting. 2019. [Online]. Available through: <https://www.quatrrobss.com/financial-
reporting.php>.
Financial Statements. 2018. [Online]. Available through:
<https://www.wallstreetmojo.com/financial-statements/>.
Accounting Concepts and Principles. 2019. [Online]. Available through: <https://www.double-
entry-bookkeeping.com/accounting-principles/accounting-concepts/>.
5

6