Financial statements are the main means of accounting achieving its objective. They communicate the financial results and financial situation of an entity to its owners, stakeholders, management, and other interested parties. If these accounting & financial statements are not understood, accounting will fail to achieve its primary goal.
The financial picture of a company should be compared with the expected results, forecasts, competitor performance, alternative investment options, investor expectations, and other factors. Management, investors, and lenders should also be able to identify the financial strengths or weaknesses of the entity.
The primary objective of accounting is to evaluate financial statements.
(i) To assist management, investors, and other stakeholders in making decisions.
(iii) To fulfill accountability – to senior managers and fund providers – as well to society regarding the use of public funds.
Financial statements of a firm only report economic events in accordance with the accounting model used. This limits the scope for evaluating the accounting model's methods of measurement, recognition, and disclosure. This is often modified historical cost for general financial reports.
A firm's financial statements only report economic events according to the accounting model adopted. This immediately limits the scope of the evaluation of the methods of recognition, measurement and disclosure used in the model. For general purpose financial reports, this is usually modified historical cost. The analyst must be familiar with the accounting model used and the specific accounting policies adopted by the reporting entity.
An analyst should be familiar with both the accounting model and specific accounting policies used by the reporting entity.