lecture_20_limitations_of_accounts

lecture_20_limitations_of_accounts - MA826 20- Limitations...

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MA826 20- Limitations of Accounts
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The shortcomings of historical cost accounting Historical cost accounting tends to overstate profits during inflation since: It ignores the higher cost of stock (replacement). underestimates the depreciation charge based on historical costs.
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The shortcomings of historical cost accounting Profits are understated during inflation if the company pays out more interest than it receives. Difficult to separate the effect of inflation from the real increase in the scale of operation when profits and assets increase in nominal terms .
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Limitations in interpretation of accounts Limitations depend on the use to which accounts are put. We will consider limitations under the following headings:- Subjectivity (are the figures correct) Appropriateness (“correct” for what purpose) Comparison between firms Some limitations of ratio analysis Limitation of figures themselves
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Subjectivity Use of different methods to arrive at figures Stock valuation (LIFO FIFO, & realisable value) Depreciation Revaluation of assets Intangibles
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This note was uploaded on 06/07/2011 for the course MA 826 taught by Professor Loba,millet during the Spring '11 term at Kent Uni..

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lecture_20_limitations_of_accounts - MA826 20- Limitations...

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