Financial accounting objectives do not include providing information: A) Useful to investors and creditors in making decisions. B) To determine market values, assess profit potential, and evaluate management. C) Helpful to investors in predicting cash flows. D) That tells about a company’s economic resources and claims to those resources. OC OD A OB
The Correct Answer and Explanation is :
The correct answer is:
B) To determine market values, assess profit potential, and evaluate management.
Explanation:
Financial accounting primarily focuses on providing information that is useful to a wide range of external users, such as investors, creditors, regulators, and other stakeholders, in making informed decisions. The objectives of financial accounting align with the following points:
- Providing useful information for decision-making: Financial accounting provides relevant, reliable, and comparable information to help investors and creditors assess a company’s performance and financial position (Objective A).
- Predicting cash flows: The financial statements allow investors and creditors to evaluate a company’s ability to generate future cash flows, which is a critical aspect of decision-making (Objective C).
- Revealing economic resources and claims: Financial statements disclose information about a company’s assets, liabilities, and equity, enabling users to understand the organization’s financial health (Objective D).
Why B is not an objective:
Determining market values, assessing profit potential, and evaluating management are not direct objectives of financial accounting. While these aspects might be indirectly inferred by analyzing financial statements, they are not the primary goals of financial accounting. Specifically:
- Market values: Financial accounting provides historical cost information rather than market values. Market valuations are typically the domain of financial analysts or valuation specialists.
- Profit potential: While income statements provide information on revenues and expenses, predicting future profits involves managerial decision-making and market analysis, which go beyond financial accounting’s scope.
- Management evaluation: Financial accounting focuses on reporting financial data, not evaluating or grading management performance. Management evaluation often involves non-financial metrics and operational data.
In summary, while financial accounting provides essential tools for decision-making, it does not aim to determine market values, assess profit potential directly, or evaluate management performance. These aspects fall outside its primary objectives.