Financial information that is reported to investors, creditors, and other external to the reporting enterprise has certain qualities that must be understood for the information to have maximum usefulness. Some of these qualities are discussed in the following:
Financial Reporting—A Means Financial information is a means to an end, not an end in and of itself. The ultimate outcome of providing financial information is to improve the quality of decision making by external parties. Financial statements themselves are simply a means by which that end id achieved.
Financial Reporting versus Financial Statements Financial reporting is broader than financial statements. Investors, creditors, and other external users of financial information learn about an enterprise in a variety of ways in addition to its formal financial statements (for example, press releases sent directly to investors and creditors, more recently open communications via the internet). Serious investors, creditors, and other external users take advantage of many sources of information that are available to support their economic decision about an enterprise.
Historical in nature Externally reported financial information is largely historical in nature. It looks back in time and reports the results of events and transactions that already have occurred. While historical information is very useful in assessing the future, the information itself is more about the past than it is about the future.
Inexact and Approximate Measures Externally reported financial information may have a look of great precision, but in fact much of it is based on estimates, judgments, and assumptions that must be made about both the past and the future. For example, assume a company purchases a piece of equipment for use in its business. To account for that asset and to incorporate the impact of it into the company’s externally reported financial information, some assumptions must be made about how long it will be used by the company—how many years it will be used, how many machine-hours it will provide, and so on.
General-Purpose Assumption As we have already mentioned, we assume that by providing information that meets the needs of investors and creditors, we also meet the information needs of other external parties. We might be able to provide superior information if we treated each potential group of external users separately and prepared different information for each group. This approach is impractical, however, and we instead of for preparing what is referred to as general-purpose information that we believe is useful to multiple user groups.
Usefulness Enhanced via Explanation The accounting profession believes that the value of externally reported financial information is enhanced by including explanations from management. This information is often no quantitative and helps to interpret the financial numbers that are presented. For this reason, financial information, including financial statements, is often accompanied by a number of notes and other explanations that help explain and interpret the numerical information.