What is the objective of Financial Statements?

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The basic objective of any financial statement is to fulfill information needs of the intended users. However, there are different kinds of financial statements for different purposes.

Broadly we can divide the financial statements in two different types:

  1. General Purpose Financial Statements
  2. Special Purpose Financial Statements

As said earlier that the basic objective of every financial statement is of assistance to the intended users in their economic decision making process by providing relevant and reliable financial information.

General Purpose Financial Statements are prepared for general users keeping general needs in mind and thus may not provide all such information that users may want

Special Purpose Financial Statements, however, are prepared keeping the information needs of certain users and may provide such additional information which general purpose financial statements may not contain. Usually special purpose financial statements focus a particular area and provide information in that regard. Special purpose financial statements may be or may not be prepared under the same accounting framework which is used to prepare general purpose financial statements. Examples include; financial statements prepared for Bank to request loan.

As special purpose financial statements are mostly tailor-made and thus are of different varieties which we cannot discuss all here. However, we can discuss the general purpose financial statements.

According to IASB Framework for Preparation and Presentation of Financial Statements, objective of (general purpose) financial statements is to provide information about the:

  1. financial position;
  2. financial performance; and
  3. changes in financial position of the entity to the wide range of users in making economic decisions.

Another major purpose of preparing financial statements is that it helps the stakeholders in assessing the stewardship of management. Management acts on behalf of shareholders and is thus responsible to make the entity profitable so that shareholders’ wealth increases. Financial statements provide an insight how management is managing the business and whether they have fulfilled their responsibility or not. Through financial statements one can assess what kind of resources were available to the management how such resources have been used by the management.

In short General Purpose Financial Statements provide information regard three aspects:

Financial Position of the entity which in simple words mean the position of the business’ assets and liabilities and how entity uses the resources at its disposal to adapt the changing business requirements and solvency. This information is presented in Statement of Financial Position which was known as Balance Sheet.

Financial Performance of the entity which relates to the entity’s ability to use the economic resources available in a profitable manner and how well entity managed to general considerable cash flows by consuming such resources. This information is presented in Statement of Comprehensive Income.

Lastly, changes in financial position means how business activities has affected the investors’ stake in the entity. This information is needed by users to assess whether entity has made satisfactory contribution to their investments or not. Also, users are interested knowing that how much cash and cash equivalents have been generated and where they have been utilized i.e. cash flows. This information is presented in the form of Statement of Cash Flows and Statement of Changes in Equity.

Although each statement serves a particular objective but all these statements should not be observed in isolation as they are interconnected and in order to get the full impression of the business one must look at them in totality or as a whole instead of considering them separately.

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