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ACCA Applied Knowledge · Financial Accounting · The context and purpose of financial statements for external reporting

Which of the following statements about the purpose of financial statements prepared for external reporting under IFRS is correct?

Financial statements for external reporting are general purpose. They give information about an entity's financial position, performance and cash flows to a wide range of users, such as investors and lenders, who cannot demand tailored reports. Management information for control is provided separately through management accounts.

  1. AThey are designed mainly to meet the specific information needs of the tax authority
  2. BThey provide general purpose information about financial position, performance and cash flows to a wide range of users, who cannot demand tailored reportsCorrect
  3. CThey are prepared primarily so that management can plan and control day-to-day operations
  4. DThey are prepared to show the market value of all the assets that the entity owns

Explanation

External financial statements are general purpose: they serve many users such as investors, lenders and other creditors who cannot require the entity to produce reports tailored to their needs. Management accounts, not financial statements, are for planning and control, so option C is wrong. Statements are not mainly for tax, and assets are not all shown at market value.

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