Accounting in Action: CM
Corporation (CMC)
As indicated in Chapter 1, CMC intends to issue stock to the public. Potential investors will be concerned about the company's operating results, cash flows, and financial position. Conner and Martin have heard words such as “relevant,” “reliable,” “comparability,” and “consistency” used in discussions about financial statements. They have no clue as to what these words mean. They ask you to explain.
Instructions
Prepare a brief memorandum to Conner and Martin describing the elements of the FASB conceptual framework. Specifically address the following:
(a) What are the objectives of financial reporting? How do general purpose financial statements help achieve the objectives of financial reporting?
(b) Exactly what do “relevant” and “reliable” mean when applied to financial statements? If they are both important, can information always be both relevant and reliable? Why or why not?
(c) What does comparability and consistency mean with respect to financial statements? Are they the same thing?
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