What are the three main objectives of financial reporting?

Financial accounting is the process by which an organization's revenue, receivables and expenses are collected, measured, recorded and finally reported into a financial statement. This process is designed to accurately reflect business activity; help companies meet legal, fiscal and statutory requirements; present financial accounts to business owners; allow for in-depth financial analysis; and facilitate efficient resource allocation. The main purpose of financial accounting is to allow third parties to assess the value of a company.

Across financial accounting, companies have two basic ways that they can structure their business’s accounting policy. Publicly traded companies must use the accrual accounting method which is standardized under generally accepted accounting principles (GAAP). The accrual method reports revenues as they are accrued as opposed to when they are received and expenses are reported as they are incurred rather than when they are paid. Many private companies also use GAAP but they are not required to do so. Private companies also have the option to use the cash accounting method.

The Purpose of Financial Statements

In a practical sense, the main objective of financial accounting is to accurately prepare an organization's financial accounts for a specific period, otherwise known as financial statements. The three primary financial statements are the income statement, the balance sheet and the statement of cash flows.

A company’s financial statements serve several purposes. They provide important information to shareholders and loan creditors, which can help to improve investment interest. The financial statements are used internally by management to manage both the current operations and future activities of the firm. The financial statements also provide information for all types of investors to prepare an analysis using trends, ratios and industry comparisons.

The American Institute of Certified Public Accountants (AICPA)

The American Institute of Certified Public Accountants (AICPA) is an industry-leading organization in the area of financial accounting. They have over 431,000 members worldwide. The AICPA is a leading source for research and alerts on topics of interest in the accounting profession. The AICPA is also responsible for developing and grading the Uniform CPA Exam.

In 1973, the AICPA released a study entitled "The Objectives of Financial Statements" which was conducted by the Trueblood Committee. The study was pivotal for the accounting industry with objectives adopted by the Financial Accounting Standards Board (FASB). The basis of the AICPA’s 1973 study reported that financial statements were primarily useful for helping multiple parties make financial decisions. The study was also released the same year that the FASB was created, which replaced the work of the AICPA in developing accounting standards for the accounting industry. Today financial accounting standards and objectives can be found through the FASB’s website.

Financial Reporting Standards

In the United States, financial reporting standards are set forth by the FASB and required under GAAP for publicly traded companies. The FASB is contracted out by the Securities and Exchange Commission (SEC) to control the approved methods and applications of financial accounting. Following these reporting standards makes it easier for individuals to understand the financial statements of various companies, as they are presented in the same manner and therefore easier to follow.

Financial accounting is normally performed by those individuals who have studied the methods, concepts, history, and laws related to its practice. In the U.S., these individuals are referred to as certified public accountants (CPA). The SEC requires that public companies annually report their financial statements and that this reporting is done by an impartial third party, which is where CPAs come in to play. This ensures that the financial statements have been properly created under all required policies.

Accounting is practiced by many businesses, and I am sure you have a general idea of or reason for its importance, but do you really understand its true status and influence?

Well, here is a look at the primary objectives of financial accounting that will help your company flourish and keep those investors coming.

What is accounting?

Accounting is the process a company uses to collect, analyze, record and report its revenue and expenses into a financial statement.

This process can be separated into three parts:

The system of bookkeeping: Considered as the foundation of accounting, it is to allow transaction records to be collected, categorized, stored in an accounting system.

Transaction tracking: which is to track the progress of your money transfer and where it is going from the moment it leaves point A to point B.

To do so, it usually involves someone finalizing a transfer, checking the receipt by searching for a reference, confirmation order, etc. and accept updates notifications.

Financial reporting: To annually or quarterly provide a financial statement which indicates the company’s financial health.

What is the purpose of financial statements?

The accounting method in business is to prepare a company’s financial statements which include the income statement, the balance sheet and cash flow statement for a specific period.

With financial reporting, a company wishes to be prepared for tax season, avoiding any legal penalties as they respect the GAAP (Generally Accepted Accounting Principles) set by the FASB (Financial Accounting Standards Board) and be eligible for investors and creditors.

What are the primary objectives for accounting?

First, a company realizes accounting to determine its true financial value of profits and losses. There are many objectives, but we will focus on the primary ones in this article, which are:

1. Compliance with statutory requirements

The first objective is to ensure that you are complying with the tax’s rules and regulations, companies Act and any other requirements of the country that the company is based in.

2. Recordkeeping

It is to maintain the financial transactions of a business for the sole purpose of analyzing a company’s profits or loss during a specific period, or else it would be impossible to make further future decisions concerning the company, i.e, expanding. It’s to prevent, if one were to require past payment or transactions, you and those records’ information from getting lost in the sauce.

Likewise, your financial position also piques the interest of stakeholders, creditors or more for future collaboration.

3. Profitability of a business

It is to measure a company’s profit or loss or, more known in accounting, as income statements, which shows the company’s revenues, expenses and equity in monetary terms over a period of time. Also conducting an analysis of its assets and liabilities.

The income statement is one of the three most important statements, with the balance sheet and cash flow statement.

Once the financial statement is produced or released every month or quarter, to disclose the company’s finances, it ensues into a net income or net profit.

Depending on the result and analysis of this income, it will determine your relationship with different types of investors or creditors.

To calculate such profit or loss, you must subtract the total of your revenues by the total of your expenses from the concerned period:

Profit = Revenues – Expenses

4. Management decision-making

The accounting process helps managers or business owners to see and evaluate their financial situation and make sound and analytical decisions of maximizing sales or profits for the businesses’ prosperity

It centers around which product to be used, produced, the pricing, and the marketing expenses, which obviously require an organization and steps:

Step 1: Defining the objectives

It is to determine what the company is looking to accomplish. If there are no goals set, then there would be nothing to work towards or accomplish. Likewise, the employees wouldn’t have allocated tasks.

Most wish to boost profits, while some follow the relationship between costs and benefits.

Step 2: Determining the problem

It is to diagnose the problem and where it is coming from and what created it and why it is affecting the company’s profits.

It could take the form of bad financial management, wrong customer service, performance issues, technological difficulties, which are the main contributing factors of a decline.

Once the solution has been found, then it is the business team to come up with accurate and convenient solutions to the problem. Which leads us to,

Step 3: Finding a solution to the issue

Once you’ve spotted the concern, it is time to find a solution that will get rid of it.

Of course, many options will have to be tested to find the one that solves the issue. It must be achievable, too.

Step 4: Assess the solution

It is to put these solutions to work. Try it out and see if they are efficient and profit-making. Study the data you have collected, on hand, to evaluate the state of business, then take on challenge of upping your success than ever before.

Step 5: Implement the compatible solution

When you have come to a conclusion of what works best, it doesn’t end there, you must constantly examine whether, changes will need to be made. It is of no surprise why the market is varied and competitive.

5. Reach a balance

It is to keep a balance between the inflow and outflow of the company’s money to help the business stay financially afloat. It determines whether the company has enough liquidity or cash to pay its expenses.

As it obviously compares them, the goal here is to keep your inflow greater than your outflow to keep a positive cash flow.

Not only that, but it is done by yearly measuring your work performances, to be competitive with your competitors or, be ahead of them on the market.

6. Budgeting

Of course, there are ways to manage your cash flow to keep a steady, yet, positive cash flow and those can be in the form of:

• Have quality goods and services to generate high profits
• Invest in gainful stocks or companies
• Adopt good advertising and marketing strategies that will have positive return on investments.
• Reduce operational costs.
• Last but not least, keep financial statements up-to-date and on hand.

7. Prevent or regulate errors

It is to ensure that your assets are never wrongfully affected to the point it creates a butterfly effect. It also helps prevent fraudulent acts.

They would be classified to clarify analyses for internal purposes, like management overseeing the position, changes, progress, policies of the company and external purposes like investments.

8. True and reliable statements

The objective here is to assure that what you deliver like financial statements is valid, current to the business’ status and respecting the reliability of the accounting principles.

It needs to be useful for auditors, managers and stakeholders for external and internal decision-making and able to checked, reviewed with evidence.

It is important for management, lenders, shareholders, the economy, etc.

9. Base for other accounting

Every other accounting takes its source, database from the financial’s: cost and managerial accounting, for example, as it is the point of supply that encompasses the two mains like cash basis and accrual.

As you can see, financial accounting holds a sacred place in the management of your company, continued success and partnerships. Hopefully, now that you know what it brings to the table, it encourages you to implement it the right way.

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