CHAPTER 3 The Balance Sheet

CHAPTER 3 The Balance Sheet - The Balance Sheet and...

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The Balance Sheet and Financial Disclosures THE BALANCE SHEET USEFULNESS In contrast to the income statement, the balance sheet is a snap shot of the enterprise at a specific point in time. It provides information that is useful in evaluating the capital structure of an enterprise and provides the basis for computing rates of return. Information contained in the balance sheet allows financial statement users to analyze the liquidity, solvency and financial flexibility of an enterprise. LIMITATIONS Although the balance sheet provides important information, there are significant limitations in its ability to communicate all of the information needed by financial statement users. These limitations include: 1. Historical Cost: Most of the information contained in the balance sheet is recorded at historical cost. Over time this information becomes less useful. 2. Estimates: Accountants have to make many estimates in recording transactions. These estimates can prove to be materially incorrect in future periods. 3. Objectively determined: In order to record a transaction or event the accountant must be able to objectively determine the item. 4. Off-balance sheet financing: Transactions can occur that are not recorded in the balance sheet and may obligate the enterprise in the future. CLASSIFICATIONS
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This note was uploaded on 02/01/2012 for the course ACF ACC220 taught by Professor Fiona during the Spring '08 term at Seneca.

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CHAPTER 3 The Balance Sheet - The Balance Sheet and...

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