Question

Karen Sepan, a recent graduate of the local state university, is presently employed by a large manufacturing company. She has been asked by Jose Martinez, controller, to prepare the company’s response to a current Preliminary Views published by the Financial Accounting Standards Board (FASB). Sepan knows that the FASB has a conceptual framework, and she believes that these concept statements could be used to support the company’s response to the Preliminary Views. She has prepared a rough draft of the response citing the objective of financial reporting.

1. Identify the objective of financial reporting.

2. Describe the level of sophistication expected of the users of financial information by the objective of financial reporting.

Answer 1

(1.)

Financial Accounting Standards Board (FASB) is a seven-member independent board comprising of accounting professionals who aim at establishing and communicating standards of financial accounting and reporting in the US. The FASB Standards, commonly known as GAAP (Generally Accepted Accounting Principles), manage the preparation of corporate financial reports and are identified as authoritative by the Securities and Exchange Commission. The Financial Accounting Standards Board is part of an independent structure which is free of all other business and professional organizations. This structure embraces the Financial Accounting Foundation (FAF), the Financial Accounting Standards Board (FASB), the Financial Accounting Standards Advisory Council (FASAC), the Governmental Accounting Standards Board (GASB), and the Governmental Accounting Standards Advisory Council (GASAC).

The objectives of Financial reporting are as follows:-

• To provide information about the cash flows to which an entity is subjected, including the timing and uncertainty of cash flows. This information is critical for determining the liquidity of a business, which in turn can be used to evaluate whether an organization can continue as a going concern.
• To provide useful information to the users of financial reports. The information should be useful from a number of perspectives, such as whether to provide credit to a customer, whether to lend to a borrower, and whether to invest in a business. The information should be comprehensible to those with a reasonable grounding in business, which means that it should not be laced with jargon or burdened with so much detail that it is impossible to extract the essentials about a business from its financial statements.
• To disclose the obligations and economic resources of an entity. There should be an emphasis on the changes in liabilities and resources, which can be used to predict future cash flows.

By concluding we can say that the main objective of financial reporting is to track, analyze and report the business income. The objective of financial reporting is to provide financial information about an entity. This information should be useful to current and potential investors and creditors. This information should help investors and creditors asses the current financial health of the entity. It should also help them in predicting the future health of an entity.

(2.)

The FASB's Conceptual Framework for Financial Reporting states the objectives of financial reporting. It also identifies two fundamental qualitative characteristics and several enhancing qualitative characteristics of decision-useful financial reporting information, as well as a constraint on financial accounting information.

The level of sophistication expected of the users of financial information is not specifically stated. However, because financial reporting identifies investors and creditors as the primary groups who will be using the information contained in the financial statements, the level of sophistication needs to be high. Investors and creditors need to be able to assess the current financial health of an entity, as well as project the timing and ability of future cash flows. It would suggest that while the sophistication level need not be that of a CPA, it needs to be high enough to be able to take past financial data and project future cash flows..