What defines the primary focus of financial accounting?

The primary focus of financial accounting is indeed on reporting to external parties like investors and regulators. Financial accounting is designed to create standardized financial statements that provide a clear, accurate, and consistent overview of a company’s financial performance and position. These reports, including the income statement, balance sheet, and cash flow statement, are essential for external stakeholders, such as investors, creditors, and regulatory bodies, who rely on this information to make informed decisions about the company.

External reporting plays a crucial role in maintaining transparency and accountability, enabling stakeholders to assess the company’s financial health and compliance with regulations. This focus ensures that the information is not just internal — as in the case of management accounting — but meets the needs of those outside the organization who rely on this information for investment, lending, or regulatory purposes.

The other options focus on aspects that are not the primary purpose of financial accounting. Internal reporting to managers pertains to managerial accounting, which is more about aiding in decision-making within the organization. Conducting audits of financial statements is a process that evaluates the accuracy of the financial reporting but does not define financial accounting itself. Establishing financial policies involves internal governance and does not directly relate to the reporting process aimed at external users. Therefore, the selection of reporting to external