SIE Knowledge of Capital Markets Question 8: Answer and Explanation

Question: 8

What is the primary purpose of financial statements?

• A. To inform investors of management's future plans
• B. To affirm compliance with SEC registration
• C. To report on historical events and values
• D. To justify the purchase of stock

Correct Answer: C

Explanation:

C: The primary purpose of financial statements is to fairly report a firm's financial activities during a period of time and/or to state the assets, liabilities, and net worth of a firm as of a specific point in time. Generally accepted accounting principles make up the main set of guidelines for financial statements of companies whose securities are traded in the United States. Choice A is not the primary purpose of financial statements, although notes regarding management's future plans may be included. Choice B is not the primary purpose of financial statements, although financial statements are an important component of compliance with SEC registration. Choice D is also not the primary purpose of financial statements, although they may be useful during a decision-making process regarding the purchase of stock.