Explain the objective of financial reporting.

What is the objective (or purpose) of financial reporting? The objective of generalpurpose

financial reporting is to provide financial information about the reporting

entity that is useful to present and potential equity investors, lenders, and other

creditors in making decisions about providing resources to the entity. Those

decisions involve buying, selling, or holding equity and debt instruments, and providing

or settling loans and other forms of credit.  Information that is decision-useful to

capital providers (investors) may also be useful to other users of financial reporting

who are not investors. Let's examine each of the elements of this objective.

General-Purpose Financial Statements

General-purpose financial statements provide financial reporting information to a

wide variety of users. For example, when Nestlé (CHE) issues its financial

statements, these statements help shareholders, creditors, suppliers, employees, and

regulators to better understand its financial position and related performance. Nestlé's

users need this type of information to make effective decisions. To be cost-effective in

providing this information, general-purpose financial statements are most appropriate.

In other words, general-purpose financial statements provide at the least cost the

most useful information possible.

Equity Investors and Creditors

The objective of financial reporting identifies investors and creditors as the primary

user group for general-purpose financial statements. Identifying investors and

creditors as the primary user group provides an important focus of general-purpose

financial reporting. For example, when Nestlé issues its financial statements, its

primary focus is on investors and creditors because they have the most critical and

immediate need for information in financial reports. Investors and creditors need this

financial information to assess Nestlé's ability to generate net cash inflows and to

understand management's ability to protect and enhance the assets of the company,

which will be used to generate future net cash inflows. As a result, the primary user

groups are not management, regulators, or some other non-investor group