Conceptual Framework for Financial Reporting

Financial performance reflected by accrual accounting
Accrual accounting depicts the effects of transactions and other events and
circumstances on a reporting entity’s economic resources and claims in the
periods in which those effects occur, even if the resulting cash receipts and
payments occur in a different period. This is important because information
about a reporting entity’s economic resources and claims and changes in its
economic resources and claims during a period provides a better basis for
assessing the entity’s past and future performance than information solely
about cash receipts and payments during that period.
Information about a reporting entity’s financial performance during a period,
reflected by changes in its economic resources and claims other than by
obtaining additional resources directly from investors and creditors (see
paragraph 1.21), is useful in assessing the entity’s past and future ability to
generate net cash inflows. That information indicates the extent to which the
reporting entity has increased its available economic resources, and thus its
capacity for generating net cash inflows through its operations rather than by
obtaining additional resources directly from investors and creditors.
Information about a reporting entity’s financial performance during a period
can also help users to assess management’s stewardship of the entity’s
economic resources.
Information about a reporting entity’s financial performance during a period
may also indicate the extent to which events such as changes in market prices
or interest rates have increased or decreased the entity’s economic resources
and claims, thereby affecting the entity’s ability to generate net cash inflows.
Financial performance reflected by past cash flows
Information about a reporting entity’s cash flows during a period also helps
users to assess the entity’s ability to generate future net cash inflows and to
assess management’s stewardship of the entity’s economic resources. That
information indicates how the reporting entity obtains and spends cash,
including information about its borrowing and repayment of debt, cash
dividends or other cash distributions to investors, and other factors that may
affect the entity’s liquidity or solvency. Information about cash flows helps
users understand a reporting entity’s operations, evaluate its financing and
investing activities, assess its liquidity or solvency and interpret other
information about financial performance.