The primary objectives of financial accounting are to provide information that is useful in:
Making Investment and Credit Decisions: This includes offering insights into the financial health and performance of a business, aiding investors and creditors in making informed decisions about providing resources to the enterprise.
Assessing Future Cash Flows: Financial accounting aims to help users estimate the amount, timing, and uncertainty of future cash flows, which are crucial for investors and creditors when evaluating the potential returns and risks associated with their investments.
Learning About Economic Resources and Claims: It involves understanding the enterprise's resources (assets), claims to those resources (liabilities and equity), and changes in these resources and claims over time.
Means to an End: Financial information serves as a tool for better decision-making rather than an end in itself. Its ultimate purpose is to enhance the quality of decisions made by external parties, thereby contributing to societal prosperity .
Historical Nature: The information provided is generally historical, looking back at past transactions and events. While this historical data is useful for making future predictions, it primarily reflects past performance .
Inexact and Approximate Measures: Financial accounting often involves estimates, judgments, and assumptions about future events. This inherent inexactness means the information may appear precise but is based on approximations .
General-Purpose Assumption: Financial information is designed to meet the needs of a wide range of users, particularly investors and creditors, under the assumption that if their needs are met, the needs of other external parties will be met as well .
Broader Than Financial Statements: Financial reporting encompasses more than just financial statements. It includes various sources of information like press releases, articles, and communications that help investors and creditors make economic decisions .
Key Financial Statements:
Balance Sheet: A snapshot of the company's financial position at a specific point in time.
Income Statement: An activity statement showing the company's profitability over a period.
Statement of Cash Flows: Details the cash inflows and outflows over a period, providing insights into the company's liquidity and financial flexibility .
In summary, financial accounting information is essential for external parties such as investors and creditors. It helps them make informed decisions by providing insights into the financial health, performance, and future prospects of an enterprise. The information is characterized by its historical nature, reliance on estimates, and general-purpose design to meet the needs of various users.