 Hello, and welcome to this session in which you would look at the objective of financial reporting. This topic is covered in an intermediate accounting course, financial accounting course, and the CPA exam. It's very important as an accounting student, as a CPA candidate, to understand the objective, why do we report financial accounting information, understanding why and what that process entails will help you understand the journal entries, the financial statement. It will help put things into perspective. Now, whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website farhatlectures.com. If you're studying for your CPA exam, I don't replace your CPA review course. I provide alternative additional resources to your CPA resources. How do I help you? I explain the material differently, which in turn will help you understand your CPA course better, which in turn will help you succeed on the CPA exam. Your risk is one month of subscription. Your potential return is passing the exam. If not for anything, take a look at my website to find out how well or not well your university doing on the CPA exam. And I do have a list of many courses, accounting courses, intermediate accounting, managerial accounting, CPA exam, FAR, and I do have my CPA exam courses to go hand in hand with your CPA review course. For example, if you're studying for FAR back, I have a FAR back. FAR backer, if you're studying with Roger, I have Roger Wiley. I have a Wiley. I also have the AI CPA exam questions as well. If you haven't connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation. Like this recording, share it with other connect with me on Instagram, Facebook, Twitter, and Reddit. So let's go ahead and get started. What is the objective of financial reporting? Why do we have financial reporting? Well, let me tell you why. We need to provide information to external users. Why? Why do we provide information and specifically not any type of information? We have to provide them financial information and we're going to see what those financial information entails. For what purpose? To help them make a better decision. Now, first, it's very important to understand who are these users? So we are providing information to who? Okay, who are these users? Well, the users are investors, creditors, mainly, and many other users, many, many other external users, many other external users. But I'm going to select or single out those two groups, investors and creditors. Now, why are you saying that investors and creditors are the most important or my main target? Then let's think about it for a moment. Who finance companies? How do companies raise money? Where do companies bring money from? Well, guess what? You have to have investors because they provide you money and you have to have creditors and creditors here. It's a fancy word for lenders, a fancy word for bankers because banks lend you money. But also people can lend you money. Other financial institution can lend you money. But think of creditors as banks. Okay, because you are more familiar with the concept of a bank because the bank will lend you money. So those two groups are the main target of financial reporting. So when we prepare financial reporting, which we'll see how we do it in a moment, we keep those two groups in mind, mainly investors and creditors. And the reason is simple. They risk their capital. They risk their money. Therefore, we need to provide them as much information as possible so they can make a proper decision whether to invest in our company or not to invest, whether to increase their investments or to reduce their investment. If they see that our sales are going up, our profit are going up, they may want to increase their investment. If the opposite is true, they may sell everything or start to trim down. Creditors, they want to know how risky is your company. Based on the risk they may or may not lend you money. And if they decide to lend you money based on the risk, they will determine your interest rate. Should they charge you 10%, 12%, 6%, so on and so forth. So the information provided is to help those two groups, creditors and investors, evaluate the company's performance in terms of cash, receipts, and disbursements. In other words, because they're interested in cash, at the end of the day, as an investor, you want to receive cash. As a creditor, you want to receive payments and interest. So you want to help them evaluate the amount of the cash you're going to be receiving or paying. How much are you going to be getting? Is it a million dollar, two million dollars, half a million? When are you going to get this money? Are you going to get it in six months, three months, three years, 10 years? Because it makes a difference. Because as an investor, you have to have a time horizon for your investments. Also, the financial information will provide them information about the uncertainty of that cash. Uncertainty is the risk. Are you really going to be getting this money or not? Because different investments will entail different risks. For example, if you put your money in the bank, if you deposit your money in the bank, well, that's a form of an investment, but that's practically zero risk. If you have your money in a savings account, as long as it's below 250, if you buy US government bonds, virtually there's no risk. You're taking zero risk. You know how much you're going to be getting, when you're going to be getting this money, and the risk is practically zero. Well, if you invest in a startup company, guess what? The amount may not be known. You don't know how much money you're going to be getting. It's a startup, and you don't know when the product will start to be popular, and there's a lot of risk the company may or may not survive. Therefore, based on those three factors, investors and creditors will either invest, not invest, so on and so forth. Now, how do we provide this information, this financial information to the investors and to the creditors? How do we provide this information? Well, we're going to provide them financial statements and disclosures that explain what's in the financial statements. So two things, financial statements and disclosure, that's what we provide. What are the financial statements? We're going to talk about the financial statements much, much more in details, but we're talking about the balance sheet here, the income statement, the statement of cash flows, and within the balance sheet, we have the statements of comprehensive income. We also provide them statements of shareholders' equity. That's all what you need to know about the financial statement today. Don't worry, there's a chapter for each one of these statements. In other words, we're going to have to expand, but the point here, this is how we communicate. This is how we tell them how well or not well we are doing. For example, the income statement real quick, it tells the investors and the users whether the company is profitable or not, whether we are making a profit. The balance sheet tells the investors and the creditors about our resources, our assets, our debt, our liabilities, and the difference between those is equity. The statement of cash flows shows them clearly what they need to see, cash receipts and cash disbursements. The statements of shareholders' equity, it's going to tell them how much equity is in the business, broken down by how much did we generate internally, how much did the investors contributed. So all this information is important to the users. And by the way, the process of this financial reporting, the process of this whole thing is called financial reporting. So the financial reporting is the process of everything that we talked about here, providing information to the users, financial reporting. Sometimes it's called financial accounting, but the technical word is financial reporting. The next question should be, why is that important? Why financial reporting is an important concept? Well, very simple because of the capital market. What is the capital market? Why is that important? Well, think of Wall Street. What is Wall Street? Well, Wall Street is, it doesn't have to be Wall Street, but think of Wall Street as the concept of Wall Street. Now you could have a Wall Street in a small town where people give money to someone to invest in a small business. But think of a company like, I don't know, Microsoft. Microsoft started in a garage, which is all startups at how they start in a garage with an idea and a person with a passion to do something, to achieve something. That's fine. You have a product. Now you want to sell your product on a large scale. You may not have enough money to produce the product or to hire employees and to expand your product lines. So what you need to do, you need money. You need capital money. So you're going to go to the capital market. Think of Wall Street. You go to Wall Street. You go to investors. You go to private people with money, your friends, your relatives. This is what the capital market is. People are going to provide you money. But if there's a capital market where you can go easily rather than going to your friends and neighbors, then it's easier for businesses to expand. So Microsoft will go to the investors at Wall Street and will tell them, here's my idea. I'm selling the product. It's selling well. Here's my financial statements. I need money. So what happened? The investors will invest in Microsoft. Microsoft will expand and Microsoft will provide more resources, goods and services for their customers. Microsoft will expand. The investors will make money. Everyone is happy. Our life is better. So that's why the financial reporting standard is very important. So as a future accountant, as a future CPA, your job is extremely important because you are the oil that keep that machine running smoothly. What's that machine? It's the capital market. It's the capital market because companies need to finance themselves via debt. They need to borrow money and through stocks. Now the only communication between the investors and the company is the financial statements. For example, when you invest in the company, usually you don't talk to the people. You don't talk to management. I mean, you can. Large investors, they want to talk to the people. They want to talk to top management to see how they function. But most investors, you don't have the chance to talk to the managers, talk to the people who are running the company. So all what you rely on is the financial statement. And based on the financial statements, you will make your decision. So that's why it's very important that this process is taken seriously. As a future CPA, you're going to be preparing financial statements for large and small companies. So take your job seriously because investors want to earn a return. Return on what? Return on resources provided. What do they provide? They provide you money. And how would they earn that? How do they earn that return? Two things. They could either receive dividend as the company makes a profit. Dividend is the amount that's distributed to the owners, or the investors might buy the stock, might buy shares in the company, then sell it at a later date at a higher price. And those two dividend and capital gain is what we call the rate of return. This is how we measure the rate of return. Now, if you are a creditor, you would receive interest payment. Interest payment is measured as how much should you receive. For example, if you give them $1,000 and they gave you $50 back a year later, well, your rate of return is 5%. That's your interest rate. So let's take a look at how do we compute this rate of return? Assume an investor provides a company with $100,000 cash by purchasing a stock at the end of year one. They receive $4,000 in dividend from the company during year two and they sell their shares at the end of year two by $106,000. So if I ask you, how much did that investor earn? What's the rate of return? Well, they invested initially $100,000. They earned $4,000 in dividend plus they sold the stock at $6,000 more, at $6,000 more. So they earned $10,000 for that year and they invested $100,000, $10,000 divided by $100,000. That will give them a rate of return of 10%. And let me tell you something. The person that invested $100,000 in Google is a multimillionaire now. Okay, so that's why you take a risk, you invest and you hope you have a return. Let's take a look at another example real quick. Adam purchased $200,000 worth of Wildwood stock, received four quarterly dividend of $1,000. Therefore, it means they received $4,000 for that year and sold the shares for $206. It means they made an additional $6,000 because they bought it at $200. They sold it at $206. So this is the capital gain and this is the dividend. Now they invested in total $200,000, so $10,000 divided by $200,000 and we're assuming here is we are within one year. That should be 5% and that's the rate of return. Now, which one would you prefer? Would you prefer the first investment or this investment? You'll prefer the first investment. The first investment gave you 10%. This investment gave you 5%. At the end of this recording, I'm going to remind you whether you are an accounting student or a CPA candidate, I don't replace your CPA review course. I provide alternative resources that's going to help you succeed on the exam and if you are an accounting student, I do have accounting courses plus resources that's going to help you do well in your classes. Take a look at my website, farhatlectures.com slash courses. Study hard, good luck, and of course, stay safe. The CPA is