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Accounting Theory and Practise

The document discusses the limitations of financial statements for prediction purposes. It provides examples of limitations, such as financial statements being based on historical costs and not adjusted for inflation. It also notes that important events may not be reported in financial statements or may not be reported in a timely manner. The document argues that audited financial statements provide important feedback for investors and creditors despite these limitations.

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Diana And hakim
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21 views

Accounting Theory and Practise

The document discusses the limitations of financial statements for prediction purposes. It provides examples of limitations, such as financial statements being based on historical costs and not adjusted for inflation. It also notes that important events may not be reported in financial statements or may not be reported in a timely manner. The document argues that audited financial statements provide important feedback for investors and creditors despite these limitations.

Uploaded by

Diana And hakim
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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ACCOUNTING THEORY & PRACTICE

GROUP ASSIGNMENT
NADIA ABDUL HAKIM 110057787
DU XINHENG 110052800
OSAMA AHMAD SALMAN 110059699
WHAT LIMITATION DOES THIS IMPOSE ON THE USEFULNESS OF THE FINANCIAL
STATEMENT FOR PREDICTION PURPOSE

FINANCIAL STATEMENT LIMITATION


• Financial Statements Are Derived from Historical Costs
• Financial Statements Are Not Adjusted for Inflation
• Financial Statements Do Not Contain Some Intangible Assets
• Financial Statements Only Cover a Specific Period of Time
• Financial Statements May Not Be Comparable
• Financial Statements May Not Have Been Verified
HOW IS THIS LIMITATION EVIDENT FROM THE STATEMENT ABOVE

Limitations of the financial statements

• Limitations of the analysis of financial indicators


• Objective limitations of financial index analysis
• Limitations of short-term solvency indicators
• Limitations of important financial indicators of earnings capacity

THE IMPACT
• The impact of the quality of financial personnel's practice on the quality of financial statements

• Impact of accounting policies and accounting treatments on financial statements


• The impact of accounting estimates on financial statement
• Inflationary impact on financial statements

• Preparation of financial statements is result-oriented


PROVIDE EXAMPLE OF IMPORTANCE EVENT THAT EITHER ARE NOT REPORTED IN
FINANCIAL STATEMENTS OR ARE NOT REPORTED IN A TIMELY MANNER

 Performing procedures at locations on a surprise or unannounced basis, for example, observing


inventory on unexpected dates or at unexpected locations or counting cash on a surprise basis.
 Requesting that inventories be counted at the end of the reporting period or on a date closer to period
end to minimize the risk of manipulation of balances in the period between the date of completion of
the count and the end of the reporting period.
 Making oral inquiries of major customers and suppliers in addition to sending written confirmations, or
sending confirmation requests to a specific party within an organization.
 Performing substantive analytical procedures using disaggregated data, for example, comparing gross
profit or operating margins by location, line of business, or month to auditor-developed expectations.
 Interviewing personnel involved in activities in areas in which a fraud risk has been identified to obtain
their insights about the risk and how controls address the risk.
 If other independent auditors are auditing the financial statements of one or more subsidiaries,
divisions, or branches, discussing with them the extent of work that needs to be performed to address
the fraud risk resulting from transactions and activities among these components.
WHY DO YOU THINK THAT THE FEEDBACK VALUE OF AUDITED FINANCIAL STATEMENTS
MAKES THEM IMPORTANT TO INVESTORS AND CREDITORS?

• Financial statement provide a snapshot of a corporation's financial health at a particular point in


time, giving insight into its performance, operations, cash flow, and overall conditions.
• In order to make better decisions, it is important for them to analyze their stocks using a variety of
measurements, rather than just a few. Some of the metric available include profitability ratios,
liquidity ratios, debt ratios, efficiency ratios, and price ratios.
•  Financial statements are important to investors because they can provide enormous information
about a company's revenue, expenses, profitability, debt load, and the ability to meet its short-term
and long-term financial obligations.
MC Donald Balance Sheet
USEFULNESS

• A balance sheet is often described as a “snapshot of a company’s financial condition.


• Basic financial statements, the balance sheet is the only statement which applies to a single point
in time of a business’ calendar year. 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, such as intelligence.
• Fixed assets are shown in the balance sheet at historical cost less depreciation up to date.
Depreciation affects the carrying value of an asset on the balance sheet.
• The historical cost will equal the carrying value only if there has been no change recorded in the
value of the asset since acquisition. Therefore, the balance sheet does not show true value of
assets. Historical cost is criticized for its inaccuracy since it may not reflect current market
valuation.
• The current assets are valued on estimated basis, so the balance sheet is not in a position to
reflect the true financial position of the business. Intangible assets like goodwill are shown in the
balance sheet at imaginary figures, which may bear no relationship to the market value.
The above balance sheet of Mc Donald company from 2020 – 2021 from there we can differentiate the
revenue and profit

• Whether the format is up-down or side-by-side, all balance sheets conform to a presentation that positions
the various account entries into five sections:

• Assets = Liabilities + Equity

1. Current assets (short-term): items that are convertible into cash within one year
2. Non-current assets (long-term): items of a more permanent nature
3. Current liabilities (short-term): obligations due within one year
4. Non-current liabilities (long-term): obligations due beyond one year
5. Shareholders’ equity (permanent): shareholders’ investment and retained earnings
RECOMMENDATION

Improve inventory management. If you trade in goods, review your inventory levels immediately. If stock is
obsolete, then shift it out the door – the cost of holding onto it could be more than you think.

Review your procurement strategy. Do you have a purchasing schedule for the year, and is it being adhered to?
Are you buying too late and missing out on seasonal sales? Make sure someone is responsible for this function of
the business and plan, plan, plan – a forward focus is crucial.

Look at the collection of your receivables. Are slow-paying debtors slowly strangling your business? You might
need to implement a more aggressive collection strategy to ensure you get paid on time.

Sell unproductive assets. If assets aren’t generating a healthy return – and likely never will – then sell them on.
Conducting financial ratio analysis is a great way to determine whether your business is using its assets effectively.
You may want to look at leasing assets rather than purchasing them – this could be cheaper than owning,
particularly for assets which date quickly such as those in the technology sector.

Maintain a forward focus. Always ask yourself, what’s around the corner? What are the threats to your current
position? What strategic plans should you make for the future? Your balance sheet should reflect your business
strategy.

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