 Hello and welcome to the session in which we look at the objectives of financial reporting for state and local government. It's worth looking back at the financial reporting objective for for-profit. When we say financial reporting objective for for-profit, what do we mean? It means when we report financial information when it comes to a business. What is the objective? Well, the objective is to provide investors and creditors information to make a decision, to make business decision. That's the purpose of financial reporting when it comes to businesses. For government, either state or local government, the objective is different, the objective is different. Why? For one thing, state and local government, as we mentioned earlier, they don't have owners. They don't have investors. They do have creditors, sure they do, banks, even people buy their bonds. They do have creditors. But the objective is not to provide information to those users. The objective of governmental reporting is to be accountable, accountability. So accountability is the cornerstone of all financial reporting in government, according to obviously the GASB. So what is accountability? Accountability basically giving the citizen the right to know. So when we provide financial information, we are giving this information, financial or non-financial. We are giving the citizen the right to know. The right to know what? The right to know how did we spend the money? How did we raise the money and how did we spend the money, remember? In the earlier session, we looked at something called inter-period equity. So it's very important that the citizens, they want to make sure that we achieved inter-period equity. It doesn't, you know, they don't want to see it, maybe, but it's important for us to show if we did achieve inter-period equity or not. So accountability imposes a duty on public officials to be accountable to citizen for raising public money and how it is spent. So the citizens, they have the right to know, how did you raise the money? How did you bring in the cash? And how do you spend the cash? And obviously, you're going to show this through a budget. Before we proceed, I would like to invite you to visit farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation, as well as your accounting courses. My CPA material is aligned with your CPA review course, such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead, start your free trial today, no obligation, no credit card required. But let's talk about inter-period equity, because I mentioned it. Inter-period equity, obviously, it relates to accountability. And what is inter-period equity? It's the government obligation to disclose whether current-year revenues were sufficient to pay current-year benefit. So did we generate enough revenue to pay for this year's benefit? Or did the citizens defer the payment for future taxpayers? In other words, we spent the money now, so for this year, the government spent the money, but they did not have the revenue. And what happened is they're going to shift this expenditure, those expenses to future taxpayer in future years. You're not supposed to do this, you're supposed to achieve inter-period equity. So the goal of financial reporting is to show all of this. Now, how do you show all of this? Well, in for-profit business, you provide the income statement, you provide the balance sheet, you provide the statement of cash flow, so on and so forth. Well, in a business, primarily, you would also provide financial statement, but the financial report that usually you focus on to know what happened is the budget. You want to see what did the government plan to do, how did they plan to raise the money, that they raise the money, how did they plan to spend the money, and how did they actually spend the money? So the budget is a cornerstone of the financial reporting. It does not mean that we don't use, they don't use other means of financial reporting. You're going to see there's all sorts of different statements, but budget usually is the most important, okay? Also the financial reporting, it will assist in determining compliance. What are we looking for? Well, we want evidence. We want evidence from the financial report that you did comply with the laws, regulations, any restriction. For example, if a bank lend you money, they would use your financial report to see if you are in compliance. This way they would ruin the loan, they may reduce your interest rates, so on and so forth. If the federal government gave you money for housing, they want to see that that money was spent on housing. So the financial report will show them if you were in compliance of what you did. Okay? Also, the budget, the budget, I'm going to go back to the budget. The budget is important because let's assume a government, every year they set a budget, then what they end up doing, they end up blowing the budget. They end up spending more money that they plan for. So what's going to happen next time? There's an election. Most probably those politicians will not be voted again. So that's why the budget is important because it gives the people the right to know. It gives them the ability to know what's going on and by doing so, they can help the government accountable. Obviously, the financial report, it's going to help the users who are the voters help evaluate how well the government is running its business. Are they achieving their objective efficiently and effectively? Efficiently and effectively means lowest cost possible in an efficient way. They're not using, they're not wasting resources. So the financial report will help in that accountability process. Also, we want to assess the financial conditions and the result of the operation. We want to know if the government is raising enough money so it meets its obligation. Are they raising enough money? How do I know this from the financial reports? That's one of the purpose of the financial report. And I want to know if they can provide services, if they can provide services for their voters. Can they meet their obligation and can they continue to provide services? Remember, because the need to know is the most important objective for state and local government. The need to know. The need to know by the citizens. The right to know. Why? To hold the government accountable. So this is the objective of financial reporting and don't forget there's a relationship between inter-period equity and accountability. So the financial report will show us if inter-period equity was achieved. How would it be achieved? We raised enough revenue to meet our expenditure for this current year. We did not shift any burden to future generation or future taxpayers. If you have any questions by all means, email me, read your textbook and the objective of financial reporting for state and local government is important for your course as well as your CPA exam. Good luck.