Objectives of Financial Reporting

To prepare financial information that will help readers of the financial statements make better decisions. Readers of financial statements may not all have the same information requirements.

1. Assessing and Predicting cash flows – this type of reader wants to know whether the company will have enough cash flow from operations to pay its bills, to repay its bank loan or to meet a lease payment. Bankers are always concerned about companies not being able to repay their loans.
2. Tax Minimization – for example, a company will defer revenues as long as possible, and recognize expenses as soon as possible
   
   However, the CCRA often have their own rules and the financial reporting policies used by a company are not relevant.
   
3. Contract compliance – a company wants to show how it has met the requirements of some obligation. In this case the company will show a partial financial statement.
   
   Sometimes this is done for Royalty payments for things like software or for production of items under agreement.
   
4. Stewardship – this generally applies to non-profit organizations. For example, the people who donate to the organization want to know that the money is being spent on the purposes of the organization.
   
   You may remember earlier this year, the toronto star newapaper did a survey of various charities and found that some charities were spending over 50% of their donations on advertising and commissions – the public was not pleased.
5. Performance evaluation – recognize revenue when effort expended, match with expenses.
   
   In the example we just looked at – on a cash basis it looks like the company did badly during the first two years and did well during the last three years.This could scare away investors – some investors like to see companies that are consistently profitable. For this reason, many investors like to use GAAP, it may help the company look more consistently profitable.