Page 29 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes 3. There are items in the assets side of the balance sheet which has no real value and are
merely deferred charges to future incomes like preliminary/pre-incorporation expenses
and other,
4. There are still the following issues or challenges in preparing the fi nancial statements
which may amount to overstatement of the accounting profit of an entity:

(a) When to and how much to recognize revenue in the Income statement.
(b) The constant challenge of when to expense or to capitalize the expenses. It is important
to determine definitely what is revenue expenditure and capital expenditure

otherwise the accounting profit will be overstated or understated. For example,

Capitalization of borrowing costs, etc.
(c) Method of depreciations and the rates to depreciate into the income statement are
selected by management to suit their business needs. Are the rates intentionally been
made lower or the depreciation rates are higher to accelerate the depreciation of the
fi xed assets,

(d) Adequacy of provisions and method of providing for doubtful debts. Are the trade
debtors recoverable and to what extent the accounting method for provision for
doubtful debts shows the realistic picture.

(e) Basis of valuation of assets-when can costs change to reflect current values? Using

replacement or current costs?
(f) Consolidation challenges-what to eliminates to reflects the overall group performance.

Some items might be omitted to show a higher accounting profi ts.

Self Assessment

Fill in the blanks:

14. Financial statements ignore ……………… trend and does not reflect the true current worth
of the enterprise.
15. There are items in the assets side of the balance sheet which has no real value and are
merely deferred charges to future incomes like ……………… expenses and other.

2.5 Summary

Financial statements are the most prominent and useful source of information to the
investors.

The objective of general purpose financial statements is to provide information about the

fi nancial position, financial performance and cash flows of an entity that is useful to a wide
range of users in making economic decisions.
Financial statements also show the results of management's stewardship of the resources
entrusted to it.

To meet this objective, financial statements provide information about an entity's:
(a) assets; (b) liabilities; (c) equity; (d) income and expenses, including gains and losses;
(e) other changes in equity; and (f) cash fl ows.

The companies have four types of financial statements, viz. Balance sheet, Income statement,
Statement of retained earnings and Statement of cash fl ows.
Financial statements are the most prominent and useful source of information to the
investors.

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