Question 7Q - Intermediate Accounting (Kieso)

Question

According to the FASB conceptual framework, the objective of financial reporting for business enterprises is based on the needs of the users of financial statements. Explain the level of sophistication that the Board assumes about the users of financial statements.

Step-by-Step Solution

Answer

Users of financial information such as investors, creditors, and their representatives are expected to have a sound knowledge of accounting concepts, financial statements as well as business and economic activities. They are also expected to be prepared to study and translate information carefully.

Meaning of financial statements

Financial statements are the statements prepared by all types of organizations to ascertain the result of operating and non-operating activities of business and help in determining the financial position as on the date of closing the books of accounts for an accounting year.

Sophistication assumed by the Boards about the users of financial statements

The Board relies on general-purpose statements to provide information to users of the financial statements. The main purpose of such statements is to provide the most useful information to various user groups.

The primary purpose of this assumption is that users need a reasonable knowledge of business and financial matters in order to understand the information contained in the financial statements. This means that the level of reasonable knowledge that can be assumed affects the manner and extent to which the information is reported when preparing financial statements.