StudyBoss » Business » General purpose financial statements

General purpose financial statements

The objective of a general purpose financial statements is to provide financial information about the reporting entity that is useful to present or potential investors and creditors in making decisions in their capacity as capital providers. Also, the objective of financial statements is focused on meeting the information needs of the primary user group. The primary user group is made up of those who have a claim (or potentially may have a claim) on an entity’s resources – its present and potential equity investors, lenders, and other creditors (capital providers).

According to the IASB Framework, the three main users group of financial statements and their purpose to use financial statements as below:

(1) Investors/Owners need financial information relating to the entity to assess how effectively the managers are running it and to make judgements about likely levels of risk and return in the future. Shareholders need information to assess the ability of the entity to pay them a return (dividend). The same applies to potential shareholders.

(2) Lenders (such as banks) need financial information about an entity in order to assess its ability to meet its obligations, to pay interest and to repay the amount borrowed.

(3) Suppliers and other trade creditors need information that enables them to determine whether amounts owed to them will be paid when due. Trade creditors are likely to be interested in an entity over a shorter period than lenders unless they are dependent upon the continuation of the entity as a major customer.

The primary user group is interested in financial information because information is useful in making decisions that the primary user group can make in their capacity as capital providers.

The decisions made by capital providers include whether and how to allocate their resources to a particular entity and how to protect or enhance their holdings. When making these decisions, capital providers are interested in assessing an entity’s ability to generate net cash inflows and management’s stewardship. Capital providers use information about an entity’s resources, claims to those resources, and changes in resources and claims as inputs into the decision-making process.

Though not mentioned by the IASB Framework, other users like employees, customers, governments and their agencies and the public. Their information needs include the following:

(1) Employees and their representative groups are interested in information about the stability and profitability of their employers. They too need information which enables them to assess the ability of the entity to provide remuneration, retirement benefits and employment opportunities.

(2) Customers have an interest in information about the continuance of an entity, especially when they have a long-term involvement with, or are dependent on, the entity.

(3) Governments and their agencies need information in order to regulate the activities of entities, to assess whether they comply with agreed pricing policies, whether financial support is needed, and how much tax they should pay. They also require information in order to determine taxation policies and as the basis for national income and statistics.

(4) Public. Entities affect members of the public in a variety of ways. For example, entities may make a substantial contribution to the local economy in many ways including the number of people they employ and their patronage of local suppliers. Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the entity and the range of its activities.

  • Competitors need financial information relating to an entity to assess the threat to sales and profits posed by those businesses and to provide a benchmark against which the competitor’s performance can be measured.
  • Managers need financial information relating to an entity to help make decisions and plans for the business and to exercise control so that the plans come to fruition.

While all the information needs of these users cannot be met by financial statements, there are needs which are common to all users. As investors are providers of risk capital to the entity, the publication of financial statements that meet their needs will also meet most of the needs of other users.

It is unlikely that one piece of information, such as a single profit figure, will meet all of the wide variety of needs which financial accounting is meant to satisfy. For example, it is not necessary that the measure of profit used for tax purposes should be the same as that used for setting an upper limit to the dividends which can be distributed to shareholders: the fact that taxable profit and distributable profit differ under current British legislation is evidence of this.

Cite This Work

To export a reference to this article please select a referencing style below:

Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.

Leave a Comment