Page 280 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes 4. There are still the following issues or challenges in preparing the financial 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:
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 fixed 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 profits.

Self Assessment

Fill in the blanks:

9. Financial statements ignore …………………… trend and does not reflect the true current
worth of the enterprise.
10. 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.

12.5 Summary

 The corporate financial statements actually give a summary of the financial condition and
profitability of the firm in both long and short term.
 The prime objective of corporate financial statements is to give information on the
performance, financial strength and financial position changes of a company.
 The four basic types of corporate financial statements are:
 Income statement
 Balance sheet

 Statement of cash flows
 Statement of retained earnings
 The uses of financial statements vary from entity to entity. For different people, they have
different uses.
 As the historical costs and money measurement concepts govern the preparation of the
balance sheet and income statements, hence these financial statements are essentially
statements reflecting historical facts.

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