Conceptual Framework

Financial Reporting
 TOPICS:
• The Objective of General Purpose Financial
Reporting
• Users of Financial Reporting
• Nature of economic resources and claims
• Financial Performance Reflected by
Accrual Accounting
Past cash Flows
• Management Stewardship
 The Objective of General Purpose Financial
Reporting
Objective:
The objective of general purpose financial reporting is to
provide financial information about the reporting entity
that is useful to existing and potential investors, lenders and
other creditors in making decisions about providing
resources to the entity.
 The Objective of General Purpose Financial
Reporting
Purpose:
General-purpose financial statements are issued throughout
the year to aid investors and creditors in their decision
making process. A set of general-purpose financial
statements includes a balance sheet, income statement,
statement of owner's equity/retained earnings, and
statement of cash flows.
 QUALITATIVE CHARACTERISTICS OF USEFUL
FINANCIAL INFORMATION
The revised framework distinguishes between two types of
qualitative characteristics that are necessary to provide
useful information:
1. Fundamental qualitative characteristics
(relevance, timeliness, verifiability and understandability)
2. Enhancing qualitative characteristics
( comparability, timeliness, verifiability and
understanding)
Fundamental Qualitative Characteristics
Relevant:
financial information is capable of making a
difference to the decision made by users. In order
to make difference, financial information has
predictive value, confirmatory value or both.
Fundamental Qualitative Characteristics
The revised Framework carries forward the notion
of materiality as an element of “relevance”. How
ever, the Boards have clarified that materiality is an
entity-specific aspect of relevance based on the
nature of magnitude of items to which the
information relates, which cannot be specified in
general terms to encompass every situation.
 Fundamental Qualitative Characteristics
• Faithful representation replaces the previously
used term “reliability”. the Boards determined there
is lack of common understanding of reliability.
Financial information that faithfully represents
economic phenomena has three characteristics:
- It is complete
– It is neutral
– It is free from error
Fundamental Characteristics Relevance Faithful Representation

Enhancing Characteristics Comparability Verifiability Timeliness Understanding

Pervasive Constraint Cost

 Users of Financial Reporting

We all know that Accounting is the language of

business. It’s essential for the top management
people to understand basic accounting principles
because it can help them understand the financial
health and performance of the company at any
given time. So that they can capitalize on it and
make advantageous decisions for the future of the
business.
 Users of Financial Reporting

Internal users are owners, managers, and employees.

External users are people outside the business entity
(organization) who use accounting
information. Examples of external users are suppliers,
banks, customers, investors, potential investors, and tax
authorities.
 Users of Financial Reporting
The following list identifies the more common users of
financial statements, and the reasons why they need this
information:
• Company management. ...
• Competitors. ...
• Customers. ...
• Employees. ...
• Governments. ...
• Investment analysts. ...
• Investors. ...
• Lenders.
 Nature of economic resources
and claims
Definition of Economic Resources
• Economic resources are the factors used in producing
goods or providing services. In other words, they are the
inputs that are used to create things or help you provide
services. Economic resources can be divided into
• Human Resources,
such as labor and management, and
• Nonhuman resources,
such as land, capital goods, financial resources, and
technology.
 Types of Economic Resources
Economists divide the factors of production into
four categories:
land,
labor,
capital, and
entrepreneurship.
• The first factor of production is land, but this includes
any natural resource used to produce goods and
services.
 Financial Performance Reflected by:

• Accrual Accounting
Definition: Accounting method that records revenues and
expenses when they are incurred, regardless of when cash is
exchanged.

The term "accrual" refers to any individual entry recording

revenue or expense in the absence of a cash transaction.

-
 Financial Performance Reflected by:
• Accrual Accounting
Under the accrual basis of accounting, revenues
are reported on the income statement when they are
earned. ...

• Under the accrual basis of accounting, expenses

are matched with the related revenues and/or are
reported when the expense occurs, not when the cash
is paid.
 Financial Performance Reflected by:
• Accruals are adjustments for:
1) revenues that have been earned but are not yet
recorded in the accounts, and
2) expenses that have been incurred but are not yet
recorded in the accounts.
The accruals need to be added via adjusting entries
so that the financial statements report these amounts.
 Financial Performance Reflected by:
• Past Cash Flow or Cash Accounting:
Cash accounting is an accounting method in which
payment receipts are recorded during the period they
are received, and expenses are recorded in the period
in which they are actually paid.
 Financial Performance Reflected by:
• Past Cash Flow or Cash Accounting:
Cash accounting is an accounting method in which
payment receipts are recorded during the period they
are received, and expenses are recorded in the period
in which they are actually paid.
•
Management Stewardship
• Stewardship. A traditional approach
of accounting that places an obligation on
stewards or agents, such as directors, to provide
relevant and reliable financial information
relating to resources over which they
have control but which are owned by others, such
as shareholders.
End of Topic