Discuss the questions above

Question

(a) "The statement of financial performance and financial position contains only past information, and therefore are not very relevant for decision making." Discuss.  (5 marks)

(b)  "It is possible for an entity to build up hidden amount of profit (known as secret reserves) by making some adjustments in the profit and loss account (Income Statement)." Discuss (6 marks)

(c)  In recent years there have been attempts to place a value on the "human assets" of a business in order to drive a figure that can be included on the statement of financial position. Do you think humans should be treated as assets?

Would "human assets" meet the conventional definitions of an asset for inclusion on the statement of financial position? Why do you say that?  (6 marks)

(d)  Define the accounting concept of materiality. Then, state THREE example of how this accounting concept can be applied in the financial statements.  (8 marks)

Answer 1

A) the Statement of position or the Balance sheet is quite useful for projections despite its historical numbers. We can use the balance sheet to conduct horizontal analysis and find trends within the company. These could include the efficiency in their asset use, their cost management and capital structure. We can see if the company financial strength is increasing or decreasing over time.

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E) Materiality is the accounting principal that states that information is material for a company to report if the omission of such information would alter an investment decision.

We could have an multi-national company with many forex transactions which of course will lead to gains and losses in translations throughout the year. A company could be making great profits in its operations but could be suffering losses in forex translations. These large losses could be material whereas smaller losses could be seen as immaterial.

In investment cash flows we could see a company taking gains and losses on dispositions of assets. If these transactions are not part of normal business activity they should be considered investing cash flow . Omission or misstatement of these cash flows as operating would be material.

Investments in other companies securities is also a common practice for large corporations. Gains and losses in available for trading securities could be material or immaterial depending on the size of the investments. Percentage of revenues from subsidiaries as compared to revenues from revenues created by the parent could be immaterial or material. This could be a company whose main operations is suffering and they are using subsidiaries performance to boost their strength on the consolidated financials.