SFAC No. 1
The first step in the conceptual framework of accounting describes the purpose of the report. Statement of Financial Accounting Concept shortly SFAC No. 1. Its original title was ‘’Objectives of Financial Reporting by Business enterprise’’. It describes the objective of financial reporting.
The main purpose of accounting is to provide financial information, and this financial information is provided through the preparation of various types of financial reports.
Financial reporting according to the conceptual framework:
1) Balance Sheet
2) Income Statement
3) Changes in Owner’s Equity
4) Cash Flow statement
Financial information is provided to interested users by preparing these statements.
i) Who are the providers of accounting information?
ii) What kind of information is required?
iii) What type of information can be provided to the user? What will they use this information for?
iv) How can users benefit more from the information?
Main objective of preparing financial reports
1. Profitability: The owner wants to know the profitability of the business. The total profit or loss and net profit or loss of the business can be known by preparing the income statement.
2. Utilization of Funds: It shows how much money has been spent on running a business and how much money has been spent on long-term investment projects.
3. Making Financial Information Understandable: Additional footnotes, explanations and notes are provided along with the statement to make the accounting information easily understandable to the users.
4. Explanation of Change of Property: Financial reporting is not only used to identify property and filing, but it is also possible to explain the change of property.
5. Total Assets Value: After preparing the balance sheet, the potential investors and owners can know the total value of the assets of the business.
6. Cash Inflow and Outflow: The amount of cash inflow and outflow is known by preparing a cash flow statement.
More Resources
Thank you for reading our resources on the Objectives of Financial Reporting (SFAC No. 1). Enhancing your knowledge more and progressing in your career, you may find the following guides helpful: