Accounting help please.

Question

Any business event that might affect the future of a business profitability should be reported on the balance sheet. True or False?

Answer 1

False. The balance sheet is a summary of the accounts on a specific day and has no relation to the future. It is a summary of the impact of past events on the accounts, but has no input from future events. If the business event occurred in the past, it's effect on the balance sheet will be accounted for already in the balance sheet. If it is a future event, it is irrelevant to that day's balance sheet. The balance sheet is NOT a record of events. The general ledger's journal entries are records of events, ie. transactions.

 

Expected future events will be reported in the notes to the financial statements so long as they adhere to the requirements for materiality.

Answer 2

The answer is false. Future events has no effect on the current financial statements or the profitability of a company. Company management may want to project or forecast the effect of producing a new product on sales and profitability of the company and this is done through the forecasting process. This process is called FORECAST and known as forward looking statements, but has no impact on the actual financial performance or statements of the company. Its purpose is to project the company outlook to its stock holders and investors.

Answer 3

It really depends on the type of event. For example, the cost of a new marketing campaign is recorded on the income statement as marketing expense even though its express purpose is to generate additional future revenue and subsequent profits. This type of expense is considered an ongoing cost of doing business. Conversely, the purchase of a new fleet of vehicles is recorded on the balance sheet as an asset of the business and a corresponding entry made to record the liability and/or reduce cash (both balance sheet items as well). The impact of such events on profitability is recognized as depreciation and recorded over the useful life of the asset.