CMA Part 1
Section A. External Financial Reporting Decisions
Introduction
The objective of financial reporting is disclosure financial and non-financial information that is useful in making decisions for internal and external stakeholders.
The reasons stakeholders need the financial information are also diverse, such as:
- Making investment decisions
Manager/directors/Owner/investor/Shareholder/Management/board of directors.
- Extending or withholding credit
Creditors/bondholder/Suppliers.
- Assessing areas of strength and weakness within the firm.
Potential investors/manager/directors/Owner/ investor/ Shareholder / Management / board of directors / financial advisors /Creditors / bondholder/ Suppliers / client.
- Evaluating management performance.
Potential investors /manager / directors/ Owner/ investor / Shareholder/ Management / board of directors / financial advisors.
- Assessing areas of strength and weakness within the firm.
Potential investors; manager / directors/ Owner / investor / Shareholder/ Management / board of directors /financial advisors /Creditors /bondholder.
- Determining whether or not the company is complying with regulatory requirements.
Regulatory agencies /Government agencies / Stock markets
- Negotiate wages & fringe benefits
Employees / manager / directors
The conflict of interest between the stakeholders is termed the agency problem.
Financial reporting provides information about the financial position, performance, and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.
| Users of Financial Statements | External Users | Internal Users | Direct Interests | Indirect Interests |
| Management
board of directors(BOD) Employees manager directors Owner investor Shareholder |
√ |
√ |
||
| potential investors
Suppliers Creditors bondholder |
√ |
√ |
||
| Regulatory agencies
Government agencies Stock markets financial advisors |
√ |
√ |
Financial statements complement each other. They describe different aspects of the same transactions, and more than one statement is necessary to provide information for a specific economic decision.
Qualitative characteristics are the attributes that make the information provided in financial reporting useful to users; these characteristics are
- Understandability
- Relevance
- Reliability
- Comparability
Financial statements must be prepared in conformity with accounting principles that are generally accepted in the United States (GAAP)
All public companies in the U.S. are mandated by the Securities and Exchange Commission (SEC) to tag financial statements using eXtensible Business Reporting Language (XBRL).
Accrual basis
Financial statements are prepared under the accrual basis of accounting. Accrual accounting records the financial effects of transactions and other events and circumstances when they occur rather than when their associated cash is paid or received.
- Revenues are recognized in the period in which they were earned even if the cash will be received in a future period.
- Expenses are recognized in the period in which they were incurred even if the cash will be paid in a future period.
