CPA Exam - FAR (Financial Accounting and Reporting)Financial ReportingEasy
A company prepares its financial statements in accordance with U.S. GAAP. Which of the following best describes the primary objective of financial reporting for external users?
- ATo provide information useful to management in making operating decisions.
- BTo provide information for determining tax liabilities.
- CTo provide information useful in making decisions about providing resources to the entity.
- DTo provide information to regulatory bodies for compliance purposes.
Show answer & explanationAnswer & explanation
Correct answer: C. To provide information useful in making decisions about providing resources to the entity.
The primary objective of financial reporting, as stated in the FASB Conceptual Framework (SFAC No. 8), is to provide financial information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.
Why the other options are wrong
- A. While financial statements can be used by management, this is not their primary external objective.
- B. Tax determination is a specific use, not the overarching primary objective of general-purpose financial reporting.
- D. Compliance is a use, but not the primary objective for external users' decision-making.
Primary Objective of Financial Reporting
To provide financial information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.
- Focuses on external users.
- Aids in capital allocation decisions.
- Based on the FASB Conceptual Framework.
Memory trick: Resource providers decide with useful info.