CFA Practice Question
Which of the following statements reflects the basic purpose of financial reporting?
A. The primary focus of financial reporting is providing information about an enterprise's resources.
B. Investments and credit decisions are often based, at least in part, on evaluations of the past performance of an enterprise.
C. Financial accounting is expressly designed to directly measure the value of a business enterprise.
Explanation: Although investment and credit decisions reflect investors' and creditors' expectations about the future performance of an enterprise, those expectations are commonly based, at least in part, on evaluations of past performance.
User Contributed Comments 7
| User | Comment |
|---|---|
| kamal3r | Financial Statements are made to assess the ongoing future capacity to generate positive cash flows. The "going concern" principle is an evidence of that. C is the best answer. B is very restrictive. |
| danlan | B is right for sure. It is not sure that "financial accouting directly measures the value of a business enterprise", financial accounting is used for the presentation of value of a business enterprise, and not a direct measure, so C is not so right. |
| jayjunk | C is not right. For example if you look at Google's balance sheet, there is no way the value of Google can be measured "directly". It's assets are way below value. Accounting statements deal with what has happened, whereas value is largely determined by what will happen in the future. |
| LIEJON | Is A wrong because of the keyword "primary focus"? Isn t A not describing one purpose of financial reporting? |
| cardinal08 | resources reads like assets to me. financial reporting goes beyond this. |
| cslau83 | LIEJON, seems like it.. as resources are only the BS.. and exludes IS CFS and SOCE |
| CalebMast | Financial reporting has multiple purposes. One verbiage I've seen calls the balance sheet the one for financial 'position,' the income statement for 'performace,' and I forget for cash flows. Financial reporting is not one of these but all of them. B states, 'in part', which makes clear the specificity and not generality of one function for all financial reporting - others (A&B) are purely general statements. |