Q2Q What is the primary objective of... [FREE SOLUTION] (2024)

Chapter 2: Q2Q (page 61)

What is the primary objective of financial reporting?

Short Answer

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The primary objective of financial reporting is to provide useful information, track cash flows and deal with liabilities.

Step by step solution

Definition of Financial Reporting

Financial reporting is the crucial process of providing key information regarding the financial activities and performance of the business over a specified period, mostly on a quarterly or yearly basis.

The key financial reporting objectives are tracking cash flows, evaluating assets and liabilities, analyzing shareholder’s equity, and measuring profits.

Primary objectives of financial reporting

There are three primary objectives of financial reporting. They are:

Most popular questions from this chapter

(Assumptions, Principles, and Constraint) Presented below are the assumptions, principles, and constraints used in this chapter.1. Economic entity assumption 6. Measurement principle (fair value)2. Going concern assumption 7. Expense recognition principle3. Monetary unit assumption 8. Full disclosure principle4. Periodicity assumption 9. Cost constraint5. Measurement principle (historical cost) 10. Revenue recognition principleInstructionsIdentify by number the accounting assumption, principle, or constraint that describes each situation below. Do not use a number more than once.(a) Allocates expenses to revenues in the proper period.(b) Indicates that fair value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.)(c) Ensures that all relevant financial information is reported.(d) Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.)(e) Indicates that personal and business record keeping should be separately maintained.(f) Separates financial information into time periods for reporting purposes.(g) Assumes that the dollar is the “measuring stick” used to report on financial performance.Question: Wal-Mart Stores, Inc.Wal-Mart Stores, Inc. provided the following disclosure in a recent annual report.New accounting pronouncement (partial) . . . the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101—“Revenue Recognition in Financial Statements” (SAB 101). This SAB deals with various revenue recognition issues, several of which are common within the retail industry. As a result of the issuance of this SAB . . . the Company is currently evaluating the effects of the SAB on its method of recognizing revenues related to layaway sales and will make any accounting method changes necessary during the first quarter of [next year].In response to SAB 101, Wal-Mart changed its revenue recognition policy for layaway transactions, in which Wal-Mart sets aside merchandise for customers who make partial payment. Before the change, Wal-Mart recognized all revenue on the sale at the time of the layaway. After the change, Wal-Mart does not recognize revenue until customers satisfy all payment obligations and take possession of the merchandise.Instructions(a) Discuss the expected effect on income (1) in the year that Wal-Mart makes the changes in its revenue recognition policy, and (2) in the years following the change.(b) Evaluate the extent to which Wal-Mart’s previous revenue policy was consistent with the revenue recognition principle.(c) If all retailers had used a revenue recognition policy similar to Wal-Mart’s before the change, are there any concerns with respect to the qualitative characteristic of comparability? Explain.Wayne Cooper has some questions regarding the theoretical framework in which GAAP is set. He knows that the FASB and other predecessor organizations have attempted to develop a conceptual framework for accounting theory formulation. Yet, Wayne’s supervisors have indicated that these theoretical frameworks have little value in the practical sense (i.e., in the real world). Wayne did notice that accounting rules seem to be established after the fact rather than before. He thought this indicated a lack of theory structure but never really questioned the process at school because he was too busy doing the homework. Wayne feels that some of his anxiety about accounting theory and accounting semantics could be alleviated by identifying the basic concepts and definitions accepted by the profession and considering them in light of his current work. By doing this, he hopes to develop an appropriate connection between theory and practice.Instructions(a) Help Wayne recognize the purpose of and benefit of a conceptual framework.(b) Identify any Statements of Financial Accounting Concepts issued by the FASB that may be helpful to Wayne in developing his theoretical background.Explain how you would decide whether to record each of the following expenditures as an asset or an expense. Assume all items are material.a) Legal fees paid in connection with the purchase of land are $1,500.b) Eduardo, Inc. paves the driveway leading to the office building at a cost of $21,000.c) A meat market purchases a meat-grinding machine at a cost of $3,500.d) On June 30, Monroe and Meno, medical doctors, pay 6 months' office rent to cover the month of July and the next 5 months.e) Smith's Hardware Company pays $9,000 in wages to laborers for construction on a building to be used in the business.f) Alvarez's Florists pays wages of $2,100 for the month an employee who serves as driver of their delivery truck.How is materiality (or immateriality) related to the proper presentation of financial statements? What factors and measures should be considered in assessing the materiality of a misstatement in the presentation of a financial statement?

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