The balance sheet is one of the financial statements discussed in this module. Write one paragraph describe the purpose of the balance sheet and at least three limitations. Explain why the balance sheet financial statement is still useful despite its limitations.
Then, read and comment on two of your peers’ posts. Feel free to challenge or substantiate what they stated in their posts.
Respond to two your classmates’ postings in any of the following ways:
Build on something your classmate said
Explain why and how you see things differently
Ask a probing or clarifying question
Share an insight from having read your classmate’s posting
Offer and support an opinion
Expand on your classmate’s posting.
Classmate’s Post #1:
Income statement – Used to report revenues, expenses, gains/losses, and net income for a business. Preparation of the income statement is required for the statement of retained earnings and for the balance sheet. Yet there are limitations to the income statement, accuracy can be affected greatly from errors in inventory. Inventory errors can impact the cost of goods sold and sales numbers depending on which accounting method they use; First in first out, last in first out, or average unit cost. Sales and cost of goods sold then effect the income tax expenses, depreciation expenses if the firm uses unit production deprecation or the estimates on useful life of equipment and the end salvage values will end up effecting all the other documents down the line. The income statement also does not account for Brand Loyalty, which increases demand and sales revenues.
Classmate’s Post #2:
There are four main financial statements. They are; balance sheet; income statements; cash flow statements; and shareholders’ equity. Each one has its own purpose, a balance sheet shows what a company owes at a fixed point in time, income statement shows money maid and lost over a period of time. Cash flow shows exchange of money over a period of time and shareholders equity shows changed in the interests of shareholders over time.
In a little more detail “income statement measures and reports the financial results of a firm’s performance for a period of time, usually a quarter or a year. The income statement provides information about the profits or losses the company has generated during the periods by conducting operating, investing and financing activities.” (Whalen 2017)
The equation for an income statement:
Financial statements also have their limitations; “Such as omissions of essential imformation, questionable accounting methods, judgements or estimates.”(Whalen 2017)
Whalen, J.M., Jones, J.P., & Pagach, D.P.(2017). Intermediate accounting: Reporting & analysis (2nd edition). Cengage learning.