OBJECTIVES OF ACCOUNTING STATEMENTS

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The general objective of accounting statements is to provide information about the results of operations, financial position, and cash flows of an organization. This information is used by the readers of accounting statements to make decisions regarding the allocation of resources.

At a more refined level, there is a different objective associated with each of the accounting statements. The income statement informs the reader about the ability of a business to generate a profit. In addition, it reveals the volume of sales, and the nature of the various types of expenses, depending on how expense information is aggregated. When reviewed over multiple time periods, the income statement can also be used to analyze trends in the results of company operations.

The objective of the balance sheet is to inform the reader about the current status of the business as of the date listed on the balance sheet. This information is used to estimate the liquidity, funding, and debt position of an entity, and is the basis for a number of liquidity ratios.

Finally, the objective of the statement of cash flows is to show the nature of cash receipts and disbursements, by a variety of categories. This information is of considerable use since cash flows do not always match the revenues and expenses shown in the income statement.

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