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Essay on The Purpose of Financial Reporting

Concepts of Financial Reporting One of the central objectives of financial reporting is to provide information that is useful to both present, and potential, creditors, investors, and other users for decision-making purposes. In order to do this, the company must determine if the items in question represents a present obligation or one to be recognized it the future. It is best to document the transactions during the time it is incurred. By recognizing the liability in this manner, investors and creditors are aware of its assets and expenses as soon as it starts to impact the firm. Since the information distributed in this way is relatively current, it can help user to predict future events such as cash flows, or lack thereof. These revisions can also help to expediently confirm past decisions, giving the user confidence that no current changes are needed. If any estimates (length of useful life, gain or loss on disposal asset, etc) are subject to change based on more accurate information over the useful life of the assets, these changes should be reflected in the financial statement for users to see. Thus, users are always aware of any significant changes made by management. Also when attempting to measure the value of the asset for the financial statement, the present value of the item should be used. Using Present value allows investors and creditors to see the current value of the firm's assets and liabilities, and therefore the effect they have on cash flows. Thus, users of financial accounting information have a relevant and reliable base on which to make their investment decisions. Users will be well equipped to re-assess or formulate their opinions of the company's financial position. Also any related expense must be recorded initially as a capitalized asset, and then expensed, in the form of depreciation or amortization over its useful

life. By recording the item as a capitalized asset, and then depreciating it, users are able to reliably see the direct effect it has on the financial position of the firm. Using the method outlined will ensure greater reliability and the most relevant information for the users and ultimately benefits all parties involved in the financial reporting process. Another benefit is that verification of the information will be visibly identified. The company's goal is to simply minimize the negative impact of events on the Financial Statements so that there will not be a tremendous impact on user decision and stock prices because executive compensation package are heavily weighted with stock options. This motivates management to stay on their toes because their alternative motive will be to boost share prices. Corporations have to be conscious of their financial statements because it must be viewed by investors, creditors, and other potential prospectors, in order to secure additional capital at low cost and avoid class action suits by shareholders. On one hand, auditors must ensure that accounting information meets the disclosure needs of the public to prevent any lawsuits. This usually happens when the user of the information believes that an auditor deliberity allows a company to get away with inconsistencies in their financial statement, or have misrepresented the true financial position of the company. Currently, the primary means of punishing negligent acts is through litigation; therefore, one can reasonably assume the threat of a lawsuit causes firms to demonstrate a greater level of care when completing an audit. Auditors are forced to represent the best interests to their own firm and their existing clients. This constant reevaluation also helps to ensure the nature and value of the information reported by the firm is not biased. In general, managers are less likely to make an attempt at distorting a section of the financial statement if they know it will be subject to constant examination. Sometime this happens because auditors are pressured by senior members of their own firm to please their clients. Thus their concerns revolve around making sure the financial statements satisfy the users needs, while disclosing as little information as possible. As requested, I interviewed 2 employees of The May Department Stores Company. The first interview was conducted with Ronald G. Bruns, Director of Control with The May Design and

Construction. The interview was conducted in the corporate office in downtown St. Louis. This interview started out being a history of his life in accounting but eventually I had to steer him in the right direction to the main reason for the interview, "what is the importance of their financial statements?" He began by stating, "It is an interpretation of how well or poorly a company is doing." "They are very important because they can make or break potential investors or existing ones." The sole purpose of providing this information to the public is to gain more contrib