Chapter 5 Discussion - Discussion Chapter# 5 1. Identify...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Discussion – Chapter# 5 1. Identify the uses and limitations of a balance sheet. The Balance Sheet provides a basis for evaluating a company’s liquidity, financial flexibility, operating capabilities, and the earning performance for the period. Liquidity describes the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid. Financial flexibility is the ability of an enterprise to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities. Operating capabilities refer to the economic resources that a company can employ in its ongoing activities. Earning performance is a measure of the efficiency and effectiveness of a company in achieving its goals. The Balance Sheet has major limitations. First, the balance sheet does not reflect current value or fair market value because accountants apply the historical cost principle in valuing and reporting assets and liabilities. Second, the balance sheet omits many items that have financial value to the business. For example, the value of the company’s human resources, including managerial skills, is often significant but not reported. In addition, professional judgment and estimates are often used in the preparation of the balance sheets and can possibly impair the usefulness of the statements. 2. Discuss at least couple of situations in which estimates could affect the usefulness of information in the balance sheet. Some situations in which estimates affect amounts reported in the balance sheet include: a) allowance for doubtful accounts. b) depreciable lives and estimated salvage values for plant and equipment. c) warranty returns. d) determining the amount of revenues that should be recorded as unearned. When estimates are required, there is subjectivity in determining the amounts. Such subjectivity can impact the usefulness of the information by reducing the reliability of the measures, either because of bias or lack of verifiability. 3.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/13/2009 for the course ACCOUNTING ACC 100 A taught by Professor A during the Fall '09 term at University of Phoenix.

Page1 / 3

Chapter 5 Discussion - Discussion Chapter# 5 1. Identify...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online