The Balance Sheet as an Investor’s Tool
You know that both internal and external users have not only the short-term success, but also the long-term success of the company at the forefront of their minds. One way that users determine short-term and long-term success is by use of the Balance Sheet. On the Balance Sheet a user may look at Retained Earnings along with the portfolio of assets displayed and compare that to the liability side of the Balance Sheet.
What are the major limitations of the balance sheet as a source of information, and how can your role as an accountant ensure that the information presented does not include errors? How would you support your claims?
Just response each posted down below # 1 to 3
Professor and Class,
Some major limitations of the balance sheet are that it is reported at historical cost so it does not give a more relevant fair value, companies use judgements and estimates to determine many of the items in the balance sheet, and there are many items omitted in the balance sheet. In order for me to ensure that the information presented does not include errors, I would always double check my numbers, math and the items in the balance sheet. Then I would make sure that it is checked behind me as well. Anyone can make a simple mistake no matter how good you are at a job. Everyone is human and can make mistakes, so it is always better to have your work checked to ensure nothing was missed.
Balance sheet has limitations associated with the information contained in the financial statement. There are three primary limitations to balance sheets, including the fact that they are recorded at historical cost, the use of estimates, and the omission of valuable things. A standard company balance sheet has three parts: assets, liabilities and ownership equity. Most of the values reported in the statement of financial position is based on historical cost basis the item is reported on the basis of valuation conducted when the transaction took place instead of the current basis of valuation and thus information might be too old to be relevant and reliable for decision making purposes. Another limitations of balance sheet and any other financial statement is that only such information reported which can be quantified easily or at least reasonably. This items reported involve the use of estimation which might not be suitable and user might be interested in knowing how such estimates have been made and whether such estimates are still relevant after the financial statements have been published.
What are the major limitations of the balance sheet as a source of information?
The balance sheet is an useful tool that reports information on assets, liabilities, and stockholders' equity of a company. The balance sheet reflects the liquidity, solvency, and financial flexibility of a company. However, that being said the balance sheet has some limitations.
1) Most assets and liabilities are reported at historical cost not reflecting a more relevant fair value.
2) Companies use judgments and estimates to determine many of the items reported in the balance sheet.
3) The balance sheet also omits many items that are of financial value, but the company is not able to record. Such as the example used in our text book. Intel employees have the knowledge and skill to develop new computer chips is arguably the company's most valuable asset, but it's not measurable (Kieso, Wegandt, & Warfield, 2016).
Kieso, D. E., Weygandt, J. J., Warfield, T. D. (2016). Intermediate Accounting, 16th Edition. [Purdue University Global Bookshelf]. Retrieved from https://purdueuniversityglobal.vitalsource.com/#/books/9781119175179/