What are the limitations of a balance sheet?
What will be an ideal response?
The balance sheet has several limitations. First, all values listed in a balance sheet are historical values-the cost of the asset when it was acquired. In the case of long-lived assets, such as land, buildings, and equipment, the value recorded in the accounting records can be widely different from the asset's current value. Given even a small level of inflation, the original cost of such assets is likely to be a much smaller number of dollars than its current value.
Additionally, every balance sheet typically contains estimated amounts, such as estimated loss from uncollectible accounts receivable, estimated warranty cost, accumulated depreciation, depletion, amortization, and income taxes. Sometimes these estimates can be significantly wrong, such as when an unexpected product defect appears.
Finally, certain assets and liabilities are omitted from the balance sheet. Assets that are not listed include the value of licenses, established business with vendors, established customers, organizational knowledge and expertise, employee loyalty and morale, and research and development. When such assets represent a major strength of your company, the balance sheet will underreport your firm's financial strength.
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Which one of the following correctly represents one of the basic financial statement models?
a. Assets - Liabilities = Net Income b. Assets + Liabilities = Owners' Equity c. Revenues + Expenses = Net Income d. Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings
Interest expense creates magnification of earnings through financial leverage because:
a. the interest rate is variable. b. interest accompanies debt financing. c. the use of interest causes higher earnings. d. interest costs are cheaper than the required rate of return to equity owners. e. while earnings available to pay interest rise, earnings to residual owners rise faster.
Your secretary, the mailroom attendant, and your co-workers are all referred to as
your__________. a. external customers b. internal customers c. secondary customers d. co-dependents
Social surroundings during the purchase decision do not include the presence of a salesperson.
Answer the following statement true (T) or false (F)