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Statement of Financial Accounting Concepts No. 1

21 Sep

CON 1: Objectives of Financial Reporting by Business
Enterprises

CON 1 HIGHLIGHTS
[Best understood in context of full Statement]

• Financial reporting is not an end in itself but is intended to provide information that is useful
in making business and economic decisions.

• The objectives of financial reporting are not immutable—they are affected by the economic,
legal, political, and social environment in which financial reporting takes place.

• The objectives are also affected by the characteristics and limitations of the kind of
information that financial reporting can provide.
—The information pertains to business enterprises rather than to industries or the economy
as a whole.
—The information often results from approximate, rather than exact, measures.
—The information largely reflects the financial effects of transactions and events that have
already happened.
—The information is but one source of information needed by those who make decisions
about business enterprises.
—The information is provided and used at a cost.

• The objectives in this Statement are those of general purpose external financial reporting by
business enterprises.
—The objectives stem primarily from the needs of external users who lack the authority to
prescribe the information they want and must rely on information management
communicates to them.
—The objectives are directed toward the common interests of many users in the ability of anenterprise to generate favorable cash flows but are phrased using investment and credit
decisions as a reference to give them a focus. The objectives are intended to be broad
rather than narrow.
—The objectives pertain to financial reporting and are not restricted to financial statements.

• The objectives state that:
—Financial reporting should provide information that is useful to present and potential
investors and creditors and other users in making rational investment, credit, and similar
decisions. The information should be comprehensible to those who have a reasonable
understanding of business and economic activities and are willing to study the information
with reasonable diligence.
—Financial reporting should provide information to help present and potential investors and
creditors and other users in assessing the amounts, timing, and uncertainty of prospective
cash receipts from dividends or interest and the proceeds from the sale, redemption, or
maturity of securities or loans. Since investors’ and creditors’ cash flows are related to
enterprise cash flows, financial reporting should provide information to help investors,
creditors, and others assess the amounts, timing, and uncertainty of prospective net cash
inflows to the related enterprise.
—Financial reporting should provide information about the economic resources of an
enterprise, the claims to those resources (obligations of the enterprise to transfer resources
to other entities and owners’ equity), and the effects of transactions, events, and
circumstances that change its resources and claims to those resources.

• “Investors” and “creditors” are used broadly and include not only those who have or
contemplate having a claim to enterprise resources but also those who advise or represent
them.

• Although investment and credit decisions reflect investors’ and creditors’ expectations about
future enterprise performance, those expectations are commonly based at least partly on
evaluations of past enterprise performance.

• The primary focus of financial reporting is information about earnings and its components.

• Information about enterprise earnings based on accrual accounting generally provides a
better indication of an enterprise’s present and continuing ability to generate favorable cash
flows than information limited to the financial effects of cash receipts and payments.

• Financial reporting is expected to provide information about an enterprise’s financial
performance during a period and about how management of an enterprise has discharged its stewardship responsibility to owners.

• Financial accounting is not designed to measure directly the value of a business enterprise,
but the information it provides may be helpful to those who wish to estimate its value.

• Investors, creditors, and others may use reported earnings and information about the
elements of financial statements in various ways to assess the prospects for cash flows. They
may wish, for example, to evaluate management’s performance, estimate “earning power,”
predict future earnings, assess risk, or to confirm, change, or reject earlier predictions or
assessments. Although financial reporting should provide basic information to aid them, they
do their own evaluating, estimating, predicting, assessing, confirming, changing, or rejecting.

• Management knows more about the enterprise and its affairs than investors, creditors, or
other “outsiders” and accordingly can often increase the usefulness of financial information
by identifying certain events and circumstances and explaining their financial effects on the
enterprise.
* * * * *

Statements of Financial Accounting Concepts

This is the first in a series of Statements of Financial Accounting Concepts. The purpose
of the series is to set forth fundamentals on which financial accounting and reporting standards
will be based. More specifically, Statements of Financial Accounting Concepts are intended to
establish the objectives and concepts that the Financial Accounting Standards Board will use in
developing standards of financial accounting and reporting.
The Board itself is likely to be the major user and thus the most direct beneficiary of the
guidance provided by the new series. However, knowledge of the objectives and concepts the
Board uses should enable all who are affected by or interested in financial accounting standards
to better understand the content and limitations of information provided by financial accounting
and reporting, thereby furthering their ability to use that information effectively and enhancing
confidence in financial accounting and reporting. That knowledge, if used with care, may also
provide guidance in resolving new or emerging problems of financial accounting and reporting
in the absence of applicable authoritative pronouncements.
Unlike a Statement of Financial Accounting Standards, a Statement of Financial
Accounting Concepts does not establish generally accepted accounting principles and therefore
is not intended to invoke the application of Rule 203 of the Rules of Conduct of the Code of
Professional Ethics of the American Institute of Certified Public Accountants (or successor rule
or arrangement of similar scope and intent).* Like other pronouncements of the Board, a
Statement of Financial Accounting Concepts may be amended, superseded, or withdrawn by
appropriate action under the Board’s Rules of Procedure.
The Board recognizes that in certain respects current generally accepted accounting
principles may be inconsistent with those that may derive from the objectives and concepts set
forth in this Statement and others in the series. In due course, the Board expects to reexamine its
pronouncements, pronouncements of predecessor standard-setting bodies, and existing financial
reporting practice in the light of newly enunciated objectives and concepts. In the meantime, a
Statement of Financial Accounting Concepts does not (a) require a change in existing generally
accepted accounting principles, (b) amend, modify, or interpret Statements of Financial
Accounting Standards, Interpretations of the FASB, effective Opinions of the Accounting
Principles Board, or effective Bulletins of the Committee on Accounting Procedure, or (c) justify
either changing existing generally accepted accounting and reporting practices or interpreting the
pronouncements listed in (b) based on personal interpretations of the objectives and concepts in
the Statements of Financial Accounting Concepts.
To establish objectives and concepts will not, by itself, directly solve financial accounting
and reporting problems. Rather, objectives and concepts are tools for solving problems.
Moreover, although individual Statements of Financial Accounting Concepts may be issued
serially, they will form a cohesive set of interrelated concepts and will often need to be used
jointly.
The new series of Statements of Financial Accounting Concepts is intended and expected
to serve the public interest within the context of the role of financial accounting and reporting in
the economy—to provide evenhanded financial and other information that, together with
information from other sources, facilitates efficient functioning of capital and other markets and
otherwise assists in promoting efficient allocation of scarce resources in the economy.

This Statement contains no conclusions about matters expected to be covered in other
Statements resulting from the Board’s conceptual framework project, such as objectives of
financial reporting by organizations other than business enterprises; elements of financial
statements and their recognition, measurement, and display; capital maintenance; unit of
measure; criteria for distinguishing information to be included in financial statements from that
which should be provided by other means of financial reporting; and criteria for evaluating and
selecting accounting information (qualitative characteristics).

INTRODUCTION AND BACKGROUND
1. This Statement establishes the objectives of general purpose external financial reporting
by business enterprises. Its concentration on business enterprises is not intended to imply that
the Board has concluded that the uses and objectives of financial reporting by other kinds of
entities are, or should be, the same as or different from those of business enterprises. Those and
related matters, including whether and, if so, how business enterprises and other organizations
should be distinguished for the purpose of establishing objectives of and basic concepts
underlying financial reporting, are issues in another phase of the Board’s conceptual framework
project.1

2. This Statement is the first of a planned series of publications in the Board’s conceptual
framework project. Later Statements are expected to cover the elements of financial statements
and their recognition, measurement, and display as well as related matters such as capital
maintenance, unit of measure, criteria for distinguishing information to be included in financial
statements from that which should be provided by other means of financial reporting, and criteria
for evaluating and selecting accounting information (qualitative characteristics). Accordingly,
this Statement contains no conclusions about matters such as the identity, number, or form of
financial statements or about the attributes to be measured 2 or the unit of measure to be used.
Thus, although designation in the objectives of certain information as relevant has implications
for communicating the information, the Statement should not be interpreted as implying a
particular set of financial statements. Nor should the Statement be interpreted as suggesting that
the relative merits of various attributes, such as historical cost/historical proceeds or current
cost/current proceeds, have been resolved. Similarly, references in it to measures in units of
money should not be interpreted as precluding the possibility of measures in constant dollars
(units of money having constant purchasing power).

3. This Statement also does not specify financial accounting standards prescribing
accounting procedures or disclosure practices for particular items or events; rather it describes
concepts and relations that will underlie future financial accounting standards and practices and
in due course serve as a basis for evaluating existing standards and practices. Its effect on
financial reporting will be reflected primarily in Statements of Financial Accounting Standards.
Until the FASB reexamines its pronouncements, pronouncements of predecessor standard-setting
bodies, and existing financial reporting practices, pronouncements such as APB Statement No. 4,
“Basic Concepts and Accounting Principles Underlying Financial Statements of Business
Enterprises,” or the Accounting Terminology Bulletins will continue to serve their intended
purpose—to describe objectives and concepts underlying standards and practices existing before
the issuance of this Statement.

4. This Statement includes a brief exposition of the reasons for the Board’s conclusions.3 It
therefore includes no separate Appendix containing a basis for conclusions. Appendix A to this
Statement contains background information for the Statement.
Financial Statements and Financial Reporting

5. The objectives in this Statement pertain to financial reporting and are not restricted to
information communicated by financial statements. Although financial reporting and financial
statements have essentially the same objectives, some useful information is better provided by
financial statements and some is better provided, or can only be provided, by means of financial
reporting other than financial statements. The following paragraphs briefly describe some major
characteristics of financial reporting and financial statements and give some examples, but they
draw no clear distinction between financial reporting and financial statements and leave
extremely broad the scope of financial reporting. The Board will draw boundaries, as needed, in other parts of the conceptual framework project or in financial accounting standards.

6. Financial statements are a central feature of financial reporting. They are a principal
means of communicating accounting information to those outside an enterprise. Although
financial statements may also contain information from sources other than accounting records,
accounting systems are generally organized on the basis of the elements of financial statements
(assets, liabilities, revenues, expenses, etc.) and provide the bulk of the information for financial
statements. The financial statements now most frequently provided are (a) balance sheet or
statement of financial position, (b) income or earnings statement, (c) statement of retained
earnings, (d) statement of other changes in owners’ or stockholders’ equity, and (e) statement of
changes in financial position (statement of sources and applications of funds). To list those
examples from existing practice implies no conclusions about the identity, number, or form of
financial statements because those matters are yet to be considered in the conceptual framework
project (paragraph 2).

7. Financial reporting includes not only financial statements but also other means of
communicating information that relates, directly or indirectly, to the information provided by the
accounting system—that is, information about an enterprise’s resources, obligations, earnings,
etc. Management may communicate information to those outside an enterprise by means of
financial reporting other than formal financial statements either because the information is
required to be disclosed by authoritative pronouncement, regulatory rule, or custom or because
management considers it useful to those outside the enterprise and discloses it voluntarily.
Information communicated by means of financial reporting other than financial statements may
take various forms and relate to various matters. Corporate annual reports, prospectuses, and
annual reports filed with the Securities and Exchange Commission are common examples of
reports that include financial statements, other financial information, and nonfinancial
information. News releases, management’s forecasts or other descriptions of its plans or
expectations, and descriptions of an enterprise’s social or environmental impact are examples of
reports giving financial information other than financial statements or giving only nonfinancial
information.

8. Financial statements are often audited by independent accountants for the purpose of
enhancing confidence in their reliability. Some financial reporting by management outside the
financial statements is audited, or is reviewed but not audited, by independent accountants or
other experts, and some is provided by management without audit or review by persons outside
the enterprise.

Environmental Context of Objectives

9. Financial reporting is not an end in itself but is intended to provide information that is
useful in making business and economic decisions—for making reasoned choices among
alternative uses of scarce resources in the conduct of business and economic activities. Thus, the
objectives set forth stem largely from the needs of those for whom the information is intended,which in turn depend significantly on the nature of the economic activities and decisions with
which the users are involved. Accordingly, the objectives in this Statement are affected by the
economic, legal, political, and social environment in the United States. The objectives are also
affected by characteristics and limitations of the information that financial reporting can provide
(paragraphs 17-23).

10. The United States has a highly developed exchange economy. Most goods and services
are exchanged for money or claims to money instead of being consumed by their producers.
Most goods and services have money prices, and cash (ready money, including currency, coins,
and money on deposit) is prized because of what it can buy. Members of the society carry out
their consumption, saving, and investment decisions by allocating their present and expected
cash resources.

11. Production and marketing of goods and services often involve long, continuous, or
intricate processes that require large amounts of capital, which in turn require substantial savings
in the economy. Savings are often invested through a complex set of intermediaries which offer
savers diverse types of ownership and creditor claims, many of which can be freely traded or
otherwise converted to cash.

12. Most productive activity in the United States is carried on through investor-owned
business enterprises, including many large corporations that buy, sell, and obtain financing in
national or multinational markets. Since investor-owners are commonly more interested in
returns from dividends and market price appreciation of their securities than in active
participation in directing corporate affairs, directors and professional managers commonly
control enterprise resources and decide how those resources are allocated in enterprise
operations. Management is accountable to owner-investors, both directly and through an elected
board of directors, for planning and controlling enterprise operations in their interests, including
gaining or maintaining competitive advantage or parity in the markets in which the enterprise
buys, sells, and obtains financing and considering and balancing various other, often competing
interests, such as those of employees, customers, lenders, suppliers, and government.

13. Business enterprises raise capital for production and marketing activities not only from
financial institutions and small groups of individuals but also from the public through issuing
equity and debt securities that are widely traded in highly developed securities markets.
Numerous, perhaps most, transactions in those markets are transfers from one investor or
creditor to another with no part of the exchange price going to the issuing enterprise. But those
transactions set the market prices for particular securities and thereby affect an enterprise’s
ability to attract investment funds and its cost of raising capital. Those having funds to invest
normally assess the expected costs, expected returns, and expected risks of alternative
investment opportunities. They attempt to balance expected risks and returns and generally
invest in high risk ventures only if they expect commensurately high returns and will accept low
expected returns only if expected risk is commensurately low. A business enterprise is unlikely
to be able to compete successfully in the markets for lendable or investment funds unless lenders
and investors expect the enterprise to be able to sell its output at prices sufficiently in excess of
its costs to enable them to expect a return from interest or dividends and market price
appreciation commensurate with the risks they perceive. Thus, well-developed securities
markets tend to allocate scarce resources to enterprises that use them efficiently and away from
inefficient enterprises.

14. In the United States, productive resources are generally privately owned rather than
government owned. Markets—which vary from those that are highly competitive, including
many commodities and securities markets, to those that involve regulated monopolies, including
markets for telephone service or electricity—are significant factors in resource allocation in the
economy. However, government intervenes in the allocation process in many ways and for
various purposes. For example, it intervenes directly by collecting taxes, borrowing, and
spending for its purchases of goods and services for government operations and programs; by
regulating business activities; or by paying subsidies. It intervenes less directly through broad
tax, monetary, and fiscal policies. Government also has a broad interest in the impact of
business enterprises on the community at large and may intervene to alter that impact. Many
government interventions are expressly designed to work through market forces, but even
government actions that are not so designed may significantly affect the balance of market
forces.

15. Moreover, government is a major supplier of economic statistics and other economic
information that are widely used by management, investors, and others interested in individual
business enterprises and are commonly included in news reports and other statistics and analyses
in ways that may broadly affect perceptions about business and economic matters. Although government statistics are primarily “macro” in nature (pertaining to the economy as a whole or to
large segments of it) and do not generally disclose much about individual business enterprises,
they are based to a considerable extent on information of the kind provided by financial
reporting by individual business enterprises.

16. The effectiveness of individuals, enterprises, markets, and government in allocating scarce
resources among competing uses is enhanced if those who make economic decisions have
information that reflects the relative standing and performance of business enterprises to assist
them in evaluating alternative courses of action and the expected returns, costs, and risks of each.
The function of financial reporting is to provide information that is useful to those who make
economic decisions about business enterprises and about investments in or loans to business
enterprises. Independent auditors commonly examine or review financial statements and
perhaps other information, and both those who provide and those who use that information often
view an independent auditor’s opinion as enhancing the reliability or credibility of the
information.

Characteristics and Limitations of Information Provided

17. The objectives of financial reporting are affected not only by the environment in which financial reporting takes place but also by the characteristics and limitations of the kind of
information that financial reporting, and particularly financial statements, can provide. The
information is to a significant extent financial information based on approximate measures of the
financial effects on individual business enterprises of transactions and events that have already
happened; it cannot be provided or used without incurring a cost.

18. The information provided by financial reporting is primarily financial in nature—it is
generally quantified and expressed in units of money. Information that is to be formally
incorporated in financial statements must be quantifiable in units of money. Other information
can be disclosed in financial statements (including notes) or by other means, but financial
statements involve adding, subtracting, multiplying, and dividing numbers depicting economic
things and events and require a common denominator. The numbers are usually exchange prices
or amounts derived from exchange prices. Quantified nonfinancial information (such as number
of employees or units of product produced or sold) and nonquantified information (such as
descriptions of operations or explanations of policies) that are reported normally relate to or
underlie the financial information. Financial information is often limited by the need to measure
in units of money or by constraints inherent in procedures, such as verification, that are
commonly used to enhance the reliability or objectivity of the information.

19. The information provided by financial reporting pertains to individual business
enterprises, which may comprise two or more affiliated entities, rather than to industries or an
economy as a whole or to members of society as consumers. Financial reporting may provide
information about industries and economies in which an enterprise operates but usually only to
the extent the information is relevant to understanding the enterprise. It does not attempt to measure the degree to which the consumption of wealth satisfies consumers’ wants. Since
business enterprises are producers and distributors of scarce resources, financial reporting bears
on the allocation of economic resources to producing and distributing activities and focuses on
the creation of, use of, and rights to wealth and the sharing of risks associated with wealth.

20. The information provided by financial reporting often results from approximate, rather
than exact, measures. The measures commonly involve numerous estimates, classifications,
summarizations, judgments, and allocations. The outcome of economic activity in a dynamic
economy is uncertain and results from combinations of many factors. Thus, despite the aura of
precision that may seem to surround financial reporting in general and financial statements in
particular, with few exceptions the measures are approximations, which may be based on rules
and conventions, rather than exact amounts.

21. The information provided by financial reporting largely reflects the financial effects of
transactions and events that have already happened. Management may communicate
information about its plans or projections, but financial statements and most other financial
reporting are historical. For example, the acquisition price of land, the current market price of a
marketable equity security, and the current replacement price of an inventory are all historical
data—no future prices are involved. Estimates resting on expectations of the future are often needed in financial reporting, but their major use, especially of those formally incorporated in
financial statements, is to measure financial effects of past transactions or events or the present
status of an asset or liability. For example, if depreciable assets are accounted for at cost,
estimates of useful lives are needed to determine current depreciation and the current
undepreciated cost of the asset. Even the discounted amount of future cash payments required
by a long-term debt contract is, as the name implies, a “present value” of the liability. The
information is largely historical, but those who use it may try to predict the future or may use the
information to confirm or reject their previous predictions. To provide information about the
past as an aid in assessing the future is not to imply that the future can be predicted merely by
extrapolating past trends or relationships. Users of the information need to assess the possible or
probable impact of factors that may cause change and form their own expectations about the
future and its relation to the past.

22. Financial reporting is but one source of information needed by those who make economic
decisions about business enterprises. Business enterprises and those who have economic
interests in them are affected by numerous factors that interact with each other in complex ways.
Those who use financial information for business and economic decisions need to combine
information provided by financial reporting with pertinent information from other sources, for
example, information about general economic conditions or expectations, political events and
political climate, or industry outlook.

23. The information provided by financial reporting involves a cost to provide and use, and
generally the benefits of information provided should be expected to at least equal the cost
involved. The cost includes not only the resources directly expended to provide the information
but may also include adverse effects on an enterprise or its stockholders from disclosing it. For
example, comments about a pending lawsuit may jeopardize a successful defense, or comments about future plans may jeopardize a competitive advantage. The collective time needed to
understand and use information is also a cost. Sometimes a disparity between costs and benefits
is obvious. However, the benefits from financial information are usually difficult or impossible
to measure objectively, and the costs often are; different persons will honestly disagree about
whether the benefits of the information justify its costs.

Potential Users and Their Interests

24. Many people base economic decisions on their relationships to and knowledge about
business enterprises and thus are potentially interested in the information provided by financial
reporting. Among the potential users are owners, lenders, suppliers, potential investors and
creditors, employees, management, directors, customers, financial analysts and advisors, brokers,
underwriters, stock exchanges, lawyers, economists, taxing authorities, regulatory authorities,
legislators, financial press and reporting agencies, labor unions, trade associations, business
researchers, teachers and students, and the public. Members and potential members of some
groups—such as owners, creditors, and employees—have or contemplate having direct
economic interests in particular business enterprises. Managers and directors, who are charged with managing the enterprise in the interest of owners (paragraph 12), also have a direct interest.
Members of other groups—such as financial analysts and advisors, regulatory authorities, and
labor unions—have derived or indirect interests because they advise or represent those who have
or contemplate having direct interests.

25. Potential users of financial information most directly concerned with a particular business
enterprise are generally interested in its ability to generate favorable cash flows because their
decisions relate to amounts, timing, and uncertainties of expected cash flows. To investors,
lenders, suppliers, and employees, a business enterprise is a source of cash in the form of
dividends or interest and perhaps appreciated market prices, repayment of borrowing, payment
for goods or services, or salaries or wages. They invest cash, goods, or services in an enterprise
and expect to obtain sufficient cash in return to make the investment worthwhile. They are
directly concerned with the ability of the enterprise to generate favorable cash flows and may
also be concerned with how the market’s perception of that ability affects the relative prices of its
securities. To customers, a business enterprise is a source of goods or services, but only by
obtaining sufficient cash to pay for the resources it uses and to meet its other obligations can the
enterprise provide those goods or services. To managers, the cash flows of a business enterprise
are a significant part of their management responsibilities, including their accountability to
directors and owners. Many, if not most, of their decisions have cash flow consequences for the
enterprise. Thus, investors, creditors, employees, customers, and managers significantly share a
common interest in an enterprise’s ability to generate favorable cash flows. Other potential users
of financial information share the same interest, derived from investors, creditors, employees,
customers, or managers whom they advise or represent or derived from an interest in how those
groups (and especially stockholders) are faring.

26. Some of the potential users listed in paragraph 24 may have specialized needs but also
have the power to obtain information needed. For example, both the information needed to
enforce tax laws and regulations and the information needed to set rates for public utilities are
specialized needs. However, although both taxing authorities and rate-making bodies often use
the information in financial statements for their purposes, both also have statutory authority to
require the specific information they need to fulfill their functions and do not need to rely on
information provided to other groups. Some investors and creditors or potential investors and
creditors may also be able to require a business enterprise to provide specified information to
meet a particular need—for example, a bank or insurance company negotiating with an
enterprise for a large loan or private placement of securities can often obtain desired information
by making the information a condition for completing the transaction.

27. Except for management, and to some extent directors, the potential users listed in
paragraph 24 are commonly described as “external users,” and accounting and reporting are
sometimes divided conventionally into internal and external parts. That broad distinction more
nearly suits the purposes of this Statement than does another common conventional
distinction—that between managerial or management accounting (which is designed to assist
management decision making, planning, and control at the various administrative levels of an enterprise) and financial accounting (which is concerned with accounting for an enterprise’s
assets, liabilities, revenues, expenses, earnings, etc.) 4 because management uses information
provided by both management accounting and financial accounting. Management needs, in
addition to financial accounting information, a great deal of management accounting information
to carry out its responsibilities in planning and controlling operations. Much of that information
relates to particular decisions or to particular cost or profit centers and is often provided in more
detail than is considered necessary or appropriate for external financial reporting, even though
the same accounting system normally accumulates, processes, and provides the information
whether it is called managerial or financial or internal or external. Directors usually have access
to at least some information available to management that is normally not provided outside an
enterprise. Since management accounting is internal to an enterprise, it can usually be tailored to
meet management’s informational needs and is beyond the scope of this Statement.

General Purpose External Financial Reporting

28. The objectives in this Statement are those of general purpose external financial reporting
by business enterprises. The objectives stem primarily from the informational needs of external
users who lack the authority to prescribe the financial information they want from an enterprise
and therefore must use the information that management communicates to them. Those potential
users include most of the groups listed in paragraph 24.

29. Financial reporting has both an internal and an external aspect, and this Statement focuses
on the external aspect. Management is as interested in information about assets, liabilities,
earnings, and related elements as external users and, among its other requirements, generally needs the same kinds of information about those elements as external users (paragraph 25).
Thus, management is a major user of the same information that is provided by external financial
reporting. However, management’s primary role in external financial reporting is that of
communicating information for use by others. For that reason, it has a direct interest in the cost,
adequacy, and understandability of external financial reporting.

30. General purpose external financial reporting is directed toward the common interest of
various potential users in the ability of an enterprise to generate favorable cash flows (paragraph
25). Thus, the objectives in this Statement are focused on information for investment and credit
decisions for reasons that are largely pragmatic, not to narrow their scope. The objectives need a
focus to avoid being vague or highly abstract. Investors and creditors and their advisors are the
most obvious prominent external groups who use the information provided by financial reporting
and who generally lack the authority to prescribe the information they want. Their decisions and
their uses of information have been studied and described to a much greater extent than those of
other external groups, and their decisions significantly affect the allocation of resources in the
economy. In addition, information provided to meet investors’ and creditors’ needs is likely to be
generally useful to members of other groups who are interested in essentially the same financial
aspects of business enterprises as investors and creditors.

31. For convenience, financial reporting is used in place of general purpose external financial
reporting by business enterprises in the remainder of this Statement.

OBJECTIVES OF FINANCIAL REPORTING

32. The following objectives of financial reporting flow from the preceding paragraphs and
proceed from the more general to the more specific. The objectives begin with a broad focus on
information that is useful in investment and credit decisions; then narrow that focus to investors’
and creditors’ primary interest in the prospects of receiving cash from their investments in or
loans to business enterprises and the relation of those prospects to the enterprise’s prospects; and
finally focus on information about an enterprise’s economic resources, the claims to those
resources, and changes in them, including measures of the enterprise’s performance, that is useful
in assessing the enterprise’s cash flow prospects. The reasons for focusing the objectives of
financial reporting primarily on investment, credit, and similar decisions are given in paragraph
30. That focus and wording do not mean that the objectives apply only to investors and creditors
and exclude everyone else. To the contrary, information that satisfies the objectives should be
useful to all who are interested in an enterprise’s future capacity to pay or in how investors or
creditors are faring.

33. The objectives are those of financial reporting rather than goals for investors, creditors, or
others who use the information or goals for the economy or society as a whole. The role of
financial reporting in the economy is to provide information that is useful in making business
and economic decisions, not to determine what those decisions should be. For example, saving
and investing in productive resources (capital formation) are generally considered to be prerequisite to increasing the standard of living in an economy. To the extent that financial
reporting provides information that helps identify relatively efficient and inefficient users of
resources, aids in assessing relative returns and risks of investment opportunities, or otherwise
assists in promoting efficient functioning of capital and other markets, it helps to create a
favorable environment for capital formation decisions. However, investors, creditors, and others
make those decisions, and it is not a function of financial reporting to try to determine or
influence the outcomes of those decisions. The role of financial reporting requires it to provide
evenhanded, neutral, or unbiased information. Thus, for example, information that indicates that
a relatively inefficient user of resources is efficient or that investing in a particular enterprise
involves less risk than it does and information that is directed toward a particular goal, such as
encouraging the reallocation of resources in favor of a particular segment of the economy, are
likely to fail to serve the broader objectives that financial reporting is intended to serve.

Information Useful in Investment and Credit Decisions

34. Financial reporting should provide information that is useful to present and potential
investors and creditors and other users in making rational investment, credit, and similar decisions. The information should be comprehensible to those who have a reasonable
understanding of business and economic activities and are willing to study the information with
reasonable diligence.

35. This Statement uses the terms investors and creditors broadly. The terms include both
those who deal directly with an enterprise and those who deal through intermediaries, both those
who buy securities from other investors or creditors and those who buy newly issued securities
from the enterprise or an underwriter, both those who commit funds for long periods and those
who trade frequently, both those who desire safety of investment and those who are willing to
accept risk to obtain high rates of return, both individuals and specialized institutions. The major
groups of investors are equity securityholders and debt securityholders. The major groups of
creditors are suppliers of goods and services who extend credit, customers and employees with
claims, lending institutions, individual lenders, and debt securityholders.5 The terms also may
comprehend security analysts and advisors, brokers, lawyers, regulatory agencies, and others
who advise or represent the interests of investors and creditors or who otherwise are interested in
how investors and creditors are faring.

36. Individual investors, creditors, or other potential users of financial information understand
to varying degrees the business and economic environment, business activities, securities
markets, and related matters. Their understanding of financial information and the way and
extent to which they use and rely on it also may vary greatly. Financial information is a tool
and, like most tools, cannot be of much direct help to those who are unable or unwilling to use it
or who misuse it. Its use can be learned, however, and financial reporting should provide
information that can be used by all—nonprofessionals as well as professionals—who are willing to learn to use it properly. Efforts may be needed to increase the understandability of financial
information. Cost-benefit considerations may indicate that information understood or used by
only a few should not be provided. Conversely, financial reporting should not exclude relevant
information merely because it is difficult for some to understand or because some investors or
creditors choose not to use it.

Information Useful in Assessing Cash Flow Prospects

37. Financial reporting should provide information to help present and potential investors and
creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash
receipts from dividends or interest and the proceeds from the sale, redemption, or maturity of
securities or loans. The prospects for those cash receipts are affected by an enterprise’s ability to
generate enough cash to meet its obligations when due and its other cash operating needs, to
reinvest in operations, and to pay cash dividends and may also be affected by perceptions of
investors and creditors generally about that ability, which affect market prices of the enterprise’s
securities. Thus, financial reporting should provide information to help investors, creditors, and
others assess the amounts, timing, and uncertainty of prospective net cash inflows to the related
enterprise.6

38. People engage in investing, lending, and similar activities primarily to increase their cash
resources. The ultimate test of success (or failure) of those activities is the extent to which they
return more (or less) cash than they cost.7 A successful investor or creditor receives not only a
return of investment but also a return on that investment (cash, goods, or services) commensurate
with the risk involved. Moreover, investment, credit, and similar decisions normally involve
choices between present cash and future cash—for example, the choice between the price of a
security that can be bought or sold or the amount of a loan and rights to expected future cash
receipts from dividends or interest and proceeds from resale or repayment. Investors, creditors,
and others need information to help them form rational expectations about those prospective
cash receipts and assess the risk that the amounts or timing of the receipts may differ from
expectations, including information that helps them assess prospective cash flows to the
enterprise in which they have invested or to which they have loaned funds.

39. Business enterprises, like investors and creditors, invest cash in noncash resources to earn
more cash. The test of success (or failure) of the operations of an enterprise is the extent to
which the cash returned exceeds (or is less than) the cash spent (invested) over the long run
(footnote 7).8 A successful enterprise receives not only a return of its investment but also a
satisfactory return on that investment. The market’s assessment of an enterprise’s expected
success in generating favorable cash flows affects the relative market prices of its securities,
although the level of market prices of securities is affected by numerous factors—such as general
economic conditions, interest rates, market psychology, and the like—that are not related to
particular enterprises. Thus, since an enterprise’s ability to generate favorable cash flows affects
both its ability to pay dividends and interest and the market prices of its securities, expected cash
flows to investors and creditors are related to expected cash flows to the enterprise in which they
have invested or to which they have loaned funds.

Information about Enterprise Resources, Claims to Those Resources, and Changes in
Them

40. Financial reporting should provide information about the economic resources of an
enterprise, the claims to those resources (obligations of the enterprise to transfer resources to
other entities and owners’ equity), and the effects of transactions, events, and circumstances that
change resources and claims to those resources.9

Economic Resources, Obligations, and Owners’ Equity

41. Financial reporting should provide information about an enterprise’s economic resources,
obligations, and owners’ equity. That information helps investors, creditors, and others identify
the enterprise’s financial strengths and weaknesses and assess its liquidity and solvency.
Information about resources, obligations, and owners’ equity also provides a basis for investors,
creditors, and others to evaluate information about the enterprise’s performance during a period
(paragraphs 42-48). Moreover, it provides direct indications of the cash flow potentials of some
resources and of the cash needed to satisfy many, if not most, obligations. That is, some of an enterprise’s resources are direct sources of cash to the enterprise, many obligations are direct
causes of cash payments by the enterprise, and reasonably reliable measures of future net cash
inflows or future net cash outflows are often possible for those resources and obligations. Many
cash flows cannot be identified with individual resources (or some obligations), however,
because they are the joint result of combining various resources in the enterprise’s operations.
Indirect measures of cash flow potential are widely considered necessary or desirable, both for
particular resources and for enterprises as a whole. That information may help those who desire
to estimate the value of a business enterprise, but financial accounting is not designed to measure
directly the value of an enterprise.

Enterprise Performance and Earnings

42. Financial reporting should provide information about an enterprise’s financial performance
during a period. Investors and creditors often use information about the past to help in assessing
the prospects of an enterprise. Thus, although investment and credit decisions reflect investors’
and creditors’ expectations about future enterprise performance, those expectations are
commonly based at least partly on evaluations of past enterprise performance.10

43. The primary focus of financial reporting is information about an enterprise’s performance
provided by measures of earnings and its components. Investors, creditors, and others who are
concerned with assessing the prospects for enterprise net cash inflows are especially interested in
that information. Their interest in an enterprise’s future cash flows and its ability to generate
favorable cash flows leads primarily to an interest in information about its earnings rather than
information directly about its cash flows. Financial statements that show only cash receipts and
payments during a short period, such as a year, cannot adequately indicate whether or not an enterprise’s performance is successful.

44. Information about enterprise earnings and its components measured by accrual accounting
generally provides a better indication of enterprise performance than information about current
cash receipts and payments. Accrual accounting attempts to record the financial effects on an
enterprise of transactions and other events and circumstances that have cash consequences for an
enterprise in the periods in which those transactions, events, and circumstances occur rather than
only in the periods in which cash is received or paid by the enterprise. Accrual accounting is
concerned with the process by which cash expended on resources and activities is returned as
more (or perhaps less) cash to the enterprise, not just with the beginning and end of that process.
It recognizes that the buying, producing, selling, and other operations of an enterprise during a
period, as well as other events that affect enterprise performance, often do not coincide with the
cash receipts and payments of the period.

45. Periodic earnings measurement involves relating to periods the benefits from and the costs
11 of operations and other transactions, events, and circumstances that affect an enterprise.
Although business enterprises invest cash to obtain a return on investment as well as a return of
investment, the investment of cash and its return often do not occur in the same period. Modern business activities are largely conducted on credit and often involve long and complex financial
arrangements or production or marketing processes. An enterprise’s receivables and payables,
inventory, investments, property, plant, equipment, and other noncash resources and obligations
are the links between its operations and other transactions, events, and circumstances that affect
it and its cash receipts and outlays. For example, labor is often used by an enterprise before it is
paid for, requiring that salaries and wages payable be accrued to recognize the obligation and
measure the effects on earnings in the period the labor is used rather than when the payroll
checks are issued. Conversely, resources such as raw materials and equipment may be paid for
by an enterprise in a period that does not coincide with their use, requiring that the resources on
hand be recognized and that the effect on earnings be deferred until the periods the resources are
used. Similarly, receivables and the related effects on earnings must often be accrued before the
related cash is received, or obligations must be recognized when cash is received and the effects
on earnings must be identified with the periods in which goods or services are provided. The
goal of accrual and deferral of benefits and sacrifices is to relate the accomplishments and the
effects so that reported earnings measures an enterprise’s performance during a period instead of
merely listing its cash receipts and outlays.12

46. Earnings and its components relate to an individual enterprise during a particular period.
Over the life of an enterprise (or other very long period), total reported earnings equals the net
cash receipts excluding those from capital changes (ignoring changes in value of money noted in
footnote 7), but that relationship between earnings and cash flows rarely, if ever, holds for
periods as short as a year. The major difference between periodic earnings measured by accrual
accounting and statements of cash receipts and outlays is timing of recognition of the
components of earnings.

47. Investors, creditors, and others often use reported earnings and information about the
components of earnings in various ways and for various purposes in assessing their prospects for
cash flows from investments in or loans to an enterprise. For example, they may use earnings
information to help them (a) evaluate management’s performance, (b) estimate “earning power”
or other amounts they perceive as “representative” of long-term earning ability of an enterprise,
(c) predict future earnings, or (d) assess the risk of investing in or lending to an enterprise. They
may use the information to confirm, reassure themselves about, or reject or change their own or
others’ earlier predictions or assessments. Measures of earnings and information about earnings
disclosed by financial reporting should, to the extent possible, be useful for those and similar
uses and purposes.

48. However, accrual accounting provides measures of earnings rather than evaluations of
management’s performance, estimates of “earning power,” predictions of earnings, assessments
of risk, or confirmations or rejections of predictions or assessments. Investors, creditors, and
other users of the information do their own evaluating, estimating, predicting, assessing,
confirming, or rejecting. For example, procedures such as averaging or normalizing reported
earnings for several periods and ignoring or averaging out the financial effects of
“nonrepresentative” transactions and events are commonly used in estimating “earning power.” However, both the concept of “earning power” and the techniques for estimating it are part of
financial analysis and are beyond the scope of financial reporting.

Liquidity, Solvency, and Funds Flows

49. Financial reporting should provide information about how an enterprise obtains and
spends cash, about its borrowing and repayment of borrowing, about its capital transactions,
including cash dividends and other distributions of enterprise resources to owners, and about
other factors that may affect an enterprise’s liquidity or solvency. For example, although reports
of an enterprise’s cash receipts and cash outlays during a period are generally less useful than
earnings information for measuring enterprise performance during a period and for assessing an
enterprise’s ability to generate favorable cash flows (paragraphs 42-46), information about cash
flows or other funds flows may be useful in understanding the operations of an enterprise,
evaluating its financing activities, assessing its liquidity or solvency, or interpreting earnings
information provided. Information about earnings and economic resources, obligations, and
owners’ equity may also be useful in assessing an enterprise’s liquidity or solvency.

Management Stewardship and Performance

50. Financial reporting should provide information about how management of an enterprise
has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise
resources entrusted to it. Management of an enterprise is periodically accountable to the owners
not only for the custody and safekeeping of enterprise resources but also for their efficient and
profitable use and for protecting them to the extent possible from unfavorable economic impacts
of factors in the economy such as inflation or deflation and technological and social changes. To the extent that management offers securities of the enterprise to the public, it voluntarily accepts
wider responsibilities for accountability to prospective investors and to the public in general.
Society may also impose broad or specific responsibilities on enterprises and their managements.

51. Earnings information is commonly the focus for assessing management’s stewardship or
accountability. Management, owners, and others emphasize enterprise performance or
profitability in describing how management has discharged its stewardship accountability. A
central question for owners, managers, potential investors, the public, and government is how an
enterprise and its owners are faring. Since earnings and its components for a single period are
often an insufficient basis for assessing management’s stewardship, owners and others may
estimate “earning power” or other average they consider “representative” of long-term
performance. As noted in paragraph 48, however, accrual accounting measures earnings for a
period rather than “earning power” or other financial analysis concepts.

52. Financial reporting should provide information that is useful to managers and directors in
making decisions in the interests of owners. Although this Statement is concerned primarily
with providing information to external users, managers and directors are responsible to owners
(and other investors) for enterprise performance as reflected by financial reporting and they are
judged at least to some extent on the enterprise performance reported. Thus, how owners have fared during a period is of equal concern to managers and owners, and information provided
should be useful to both in meeting their common goal.

53. Financial reporting, and especially financial statements, usually cannot and does not
separate management performance from enterprise performance. Business enterprises are highly
complex institutions, and their production and marketing processes are often long and intricate.
Enterprise successes and failures are the result of the interaction of numerous factors.
Management ability and performance are contributing factors, but so are events and
circumstances that are often beyond the control of management, such as general economic
conditions, supply and demand characteristics of enterprise inputs and outputs, price changes,
and fortuitous events and circumstances. What happens to a business enterprise is usually so
much a joint result of a complex interaction of many factors that neither accounting nor other
statistical analysis can discern with reasonable accuracy the degree to which management, or any
other factor, affected the joint result. Actions of past managements affect current periods’
earnings, and actions of current management affect future periods’ earnings. Financial reporting
provides information about an enterprise during a period when it was under the direction of a
particular management but does not directly provide information about that management’s
performance. The information is therefore limited for purposes of assessing management
performance apart from enterprise performance.

Management Explanations and Interpretations

54. Financial reporting should include explanations and interpretations to help users
understand financial information provided. For example, the usefulness of financial information as an aid to investors, creditors, and others in forming expectations about a business enterprise
may be enhanced by management’s explanations of the information. Management knows more
about the enterprise and its affairs than investors, creditors, or other “outsiders” and can often
increase the usefulness of financial information by identifying certain transactions, other events,
and circumstances that affect the enterprise and explaining their financial impact on it. In
addition, dividing continuous operations into accounting periods is a convention and may have
arbitrary effects. Management can aid investors, creditors, and others in using financial
information by identifying arbitrary results caused by separating periods, explaining why the
effect is arbitrary, and describing its effect on reported information. Moreover, financial
reporting often provides information that depends on, or is affected by, management’s estimates
and judgment. Investors, creditors, and others are aided in evaluating estimates and judgmental
information by explanations of underlying assumptions or methods used, including disclosure of
significant uncertainties about principal underlying assumptions or estimates. Financial
reporting may, of course, provide information in addition to that specified by financial
accounting standards, regulatory rules, or custom.

THE CONCEPTUAL FRAMEWORK: A PERSPECTIVE

55. Paragraphs 40-54 focus the objectives of financial reporting by business enterprises on
information about the economic resources of an enterprise, the claims to those resources, and the
effects of transactions, events, and circumstances that change resources and claims to them. The
paragraphs emphasize information about an enterprise’s performance provided by measures of
earnings and its components and also broadly describe other kinds of information that financial
reporting should provide. The objectives lead to, but leave unanswered, questions such as the
identity, number, and form of financial statements; elements of financial statements and their
recognition, measurement, and display; information that should be provided by other means of
financial reporting; and meanings and balancing or trading-off of relevance, reliability, and other
criteria for evaluating and selecting accounting information (qualitative characteristics). Those
matters are, as noted in paragraph 2, topics of other Statements that are expected to follow this
Statement on objectives.

56. Financial statements are the basic means of communicating the information described in
paragraphs 40-54 to those who use it. The elements of financial statements provide “. .
.information about the economic resources of an enterprise, the claims to those resources
(obligations of the enterprise to transfer resources to other entities and owners’ equity), and the
effects of transactions, events, and circumstances that change resources and claims to those
resources” (paragraph 40), including “. . .information about an enterprise’s performance provided
by measures of earnings and its components” (paragraph 43). Thus, the next phase of the
conceptual framework project pertains to the elements of financial statements.

This Statement was adopted by the unanimous vote of the seven members of the Financial
Accounting Standards Board:

Donald J. Kirk, Chairman
Oscar S. Gellein
John W. March
Robert A. Morgan
David Mosso
Robert T. Sprouse
Ralph E. Walters

Appendix A: BACKGROUND INFORMATION

57. The need for a conceptual framework for financial accounting and reporting, beginning
with consideration of the objectives of financial reporting, is generally recognized. The
Accounting Principles Board issued APB Statement No. 4, “Basic Concepts and Accounting
Principles Underlying Financial Statements of Business Enterprises,” in 1970. When the
Financial Accounting Standards Board came into existence, the Study Group on the Objectives
of Financial Statements was at work, and its report, “Objectives of Financial Statements,” was
published in October 1973 by the American Institute of Certified Public Accountants.

58. The Financial Accounting Standards Board issued a Discussion Memorandum,
“Conceptual Framework for Accounting and Reporting: Consideration of the Report of the Study
Group on the Objectives of Financial Statements,” dated June 6, 1974 and held a public hearing
on September 23 and 24, 1974 on the objectives of financial statements. The Discussion
Memorandum and the hearing were based primarily on the Report of the Study Group on the
Objectives of Financial Statements. The Board received 95 written communications responding
to the Discussion Memorandum, and 20 parties presented their views orally and answered Board
members’ questions at the hearing.

59. On December 2, 1976, the Board issued three documents:
Tentative Conclusions on Objectives of Financial Statements of Business Enterprises,
FASB Discussion Memorandum, “Conceptual Framework for Financial Accounting and
Reporting: Elements of Financial Statements and Their Measurement,” and Scope and Implications of the Conceptual Framework Project.
The same task force, with only one membership change, provided counsel in preparing both
Discussion Memoranda. Eleven persons from academe, the financial community, industry, and
public accounting served on the task force while the Discussion Memoranda were written.
60. The Board considered the 12 objectives of financial statements in the Study Group Report
but has not attempted to reach conclusions on some of them—for example, reporting current
value and changes in current value, providing a statement of financial activities, providing
financial forecasts, determining the objectives of financial statements for governmental and
not-for-profit organizations, and reporting enterprise activities affecting society. Some issues
about reporting current values and changes in current values were discussed in the Discussion
Memorandum, “Elements of Financial Statements and Their Measurement,” and the Board has a
project on supplementary disclosures of the effects of changing prices on business enterprises
(paragraph 61). The Board also has a project on objectives of financial reporting by
organizations other than business enterprises (footnote 1). The other matters may be dealt with in later phases of the conceptual framework project.

61. The Board held public hearings (a) August 1 and 2, 1977 on the Tentative Conclusions on
Objectives of Financial Statements and Chapters 1-5 of the Discussion Memorandum concerning
definitions of the elements of financial statements and (b) January 16-18, 1978 on the remaining
chapters of the Discussion Memorandum concerning capital maintenance or cost recovery,
qualities of useful financial information (“qualitative characteristics”), and measurement of the
elements of financial statements.

62. The Board received 283 written communications on the subject of the August 1977
hearing, of which 214 commented on the objectives and 221 commented on the elements, and 27
parties presented their views orally and answered Board members’ questions at the hearing. The
Board issued an Exposure Draft of a proposed Statement of Financial Accounting Concepts on
“Objectives of Financial Reporting and Elements of Financial Statements of Business
Enterprises,” dated December 29, 1977 and received 135 letters of comment.

63. The major difference between this Statement and the Exposure Draft is the scope of the
subject matter. “Elements of financial statements of business enterprises” and the brief
comments on “qualitative characteristics” (paragraphs 41-66 and 69-75, respectively, of the
Exposure Draft) have been omitted to be the subjects of separate exposure drafts. Other
significant changes are (a) the “Highlights” preceding the text, (b) the subheadings in the third
objective (paragraphs 40-54), and (c) reorganization of the “Introduction and Background”
paragraphs, including the position of “characteristics and limitations of information provided” in
the forepart of the Statement.
****

Footnotes
CON1, Footnote *– Rule 203 prohibits a member of the American Institute of Certified Public
Accountants from expressing an opinion that financial statements conform with generally
accepted accounting principles if those statements contain a material departure from an
accounting principle promulgated by the Financial Accounting Standards Board, unless the
member can demonstrate that because of unusual circumstances the financial statements
otherwise would have been misleading.

CON1, Footnote 1–In August 1977, the Board announced its sponsorship of a research study on
the objectives and basic concepts underlying financial reporting by organizations other than
business enterprises. The Board published the research report, Financial Accounting in
Nonbusiness Organizations: An Exploratory Study of Conceptual Issues, by Robert N. Anthony,
in May 1978. It issued a Discussion Memorandum, “Objectives of Financial Reporting by
Nonbusiness Organizations,” in June 1978 and held public hearings in October and November
1978.

CON1, Footnote 2–“Attributes to be measured” refers to the traits or aspects of an element to be
quantified or measured, such as historical cost/historical proceeds, current cost/current proceeds,
etc. Attribute is a narrower concept than measurement, which includes not only identifying the
attribute to be measured but also selecting a scale of measurement (for example, units of money
or units of constant purchasing power). “Property” is commonly used in the sciences to describe
the trait or aspect of an object being measured, such as the length of a table or the weight of a stone. But “property” may be confused with land and buildings in financial reporting contexts,
and “attribute” has become common in accounting literature and is used in this Statement.

CON1, Footnote 3–The Board has previously provided a more detailed discussion of the
environment of financial reporting and the basis underlying the Board’s conclusions on
objectives of financial reporting by business enterprises in Chapters 1-3 of Tentative Conclusions
on Objectives of Financial Statements of Business Enterprises (Stamford, CT: Financial
Accounting Standards Board, December 2, 1976). The Board may reissue pertinent parts of that
discussion, and perhaps other related material, in a more permanent publication.

CON1, Footnote 4–That distinction between managerial and financial accounting is made, for
example, by Eric L. Kohler, A Dictionary for Accountants, 5th ed. (Englewood Cliffs, NJ:
Prentice-Hall, Inc., 1975), pp. 208 and 303, and by Sidney Davidson, James S. Schindler, Clyde
P. Stickney, and Roman L. Weil, Accounting: The Language of Business, 3rd ed. (Glen Ridge,
NJ: Thomas Horton and Daughters, Inc., 1977), pp. 24 and 34.

CON1, Footnote 5–Debt securityholders are included in both groups because they are investors
as that term is commonly used as well as creditors by contract and usual legal definition. Moreover, it is often convenient to refer to them as investors without making a precise
distinction between “investors in debt securities” and “investors in equity securities.” That
distinction is made if it is significant.

CON1, Footnote 6–Several respondents to the Exposure Draft, “Objectives of Financial
Reporting and Elements of Financial Statements of Business Enterprises,” interpreted this
objective as requiring “cash flow information,” “current value information,” or “management
forecast information.” However, the objective focuses on the purpose for which information
provided should be useful–emphasizing the importance of cash to people and the activities they
use to increase cash inflows that also help increase the productive resources and outputs of goods
and services in an economy–rather than the kinds of information that may be useful for that
purpose. The objective neither requires nor prohibits “cash flow information,” “current value
information,” “management forecast information,” or any other specific information.
Conclusions about “current value information” and “management forecast information” are
beyond the scope of this Statement. Paragraphs 42-44 note that information about cash receipts
and disbursements is not usually considered to be the most useful information for the purposes
described in this objective.

CON1, Footnote 7–Questions of measurement scale and unit of measure are beyond the scope of
this Statement (paragraph 2). Therefore, the description in paragraphs 38, 39, and others ignore,
for example, that a dollar of cash received as dividends, interest, or proceeds from resale or
repayment is not necessarily equal in purchasing power to a dollar invested or loaned earlier, a
dollar of cash collected from customers is not necessarily equal in purchasing power to a dollar
spent earlier, and a dollar of cash paid to a creditor is not necessarily equal in purchasing power
to a dollar received earlier.

CON1, Footnote 8–Descriptions of operations of business enterprises commonly describe a
cycle that begins with cash outlays and ends with cash receipts. That description is not only
straightforward and convenient but also generally fits manufacturing, merchandising, financial,
and service enterprises whose operations comprise primarily activities such as acquiring goods
and services, increasing their value by adding time, place, or form utility, selling them, and
collecting the selling price. Cash receipts may precede cash payments, however, and commonly
do in the operations of some service and financial enterprises. The order of cash flows does not
affect the basic nature of operations but may comp
licate descriptions and analyses.

CON1, Footnote 9–Economic resources, claims to those resources, changes in resources and
claims, and the elements that represent them in financial statements are the subject of the next
phase in the Board’s conceptual framework project on elements of financial statements of
business
enterprises.

CON1, Footnote 10–Investors and creditors ordinarily invest in or lend to enterprises that they
expect to continue in operation–an expectation that is familiar to accountants as “the going
concern” assumption. Information about the past is usually less useful in assessing prospects for an enterprise’s future if the enterprise is in liquidation or is expected to enter liquidation. Then,
emphasis shifts from performance to liquidation of the enterprise’s resources and obligations.
The objectives of financial reporting do not necessarily change if an enterprise shifts from
expected operation to expected liquidation, but the information that is relevant to those
objectives, including measures of elements of financial statements, ma
y change.

CON1, Footnote 11–“Cost” is the sacrifice incurred in economic activities–that which is given
up or foregone to consume, to save, to exchange, to produce, etc. For example, the value of cash
or other resources given up (or the present value of an obligation incurred) in exchange for a
resource is the cost of the resource acquired. Similarly, the expiration of future benefits caused
by using a resource in production is the cost of using it.

CON1, Footnote 12–The process described in this paragraph is commonly called the “matching
of costs and revenues,” and “matching” is a significant part of it, though not the whole.
“Matching” is one of the subjects of the next phase in the conceptual framework project on
elements of financial statements.

 
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