What is the primary purpose of financial reporting?

The primary purpose of financial reporting is to provide useful financial information to external users for decision-making. This encompasses a wide range of stakeholders, including investors, creditors, analysts, and regulators, who rely on accurate and timely financial data to assess the financial health and performance of an organization.

Financial reporting serves to summarize and present financial data in a format that is easily understandable, typically following established accounting principles and standards. This allows external users to make informed decisions regarding resource allocation, investment strategies, credit assessments, and overall economic evaluation of the entity.

While tracking internal expenses and profits is important for a company's internal management practices, this purpose is more focused on operational efficiency rather than external decision-making. Compliance with regulatory requirements is indeed a significant aspect of financial reporting, but it serves as a means to an end, rather than the primary purpose itself. Similarly, assisting in tax calculations is a functional requirement, but it does not encompass the broad objective of financial reporting, which is to furnish stakeholders with relevant information for their decision-making processes.