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 reporting on the financial position, performance, and cash flows of an organization, which is essential for various stakeholders such as investors, creditors, regulators, and analysts. These external users rely on financial statements to make informed decisions regarding investing in the company, lending, regulatory compliance, and understanding the company's financial health and operational efficiency.

While providing historical financial information to management and tracking company expenses are important aspects of an organization's financial practices, they primarily serve internal purposes. Compliance with tax regulations is also crucial, yet it is a specific requirement of financial reporting rather than its overarching goal. The essence of financial reporting lies in ensuring transparency and accountability to external parties, thus facilitating rational and informed economic decisions based on the financial health of the organization.