Limitations of Financial Statement

Limitations of Financial Statement

Recently, the field of accounting was attacked in an opinion article written by an economist. The article specifically pointed out errors in financial statements.

The article charged that the balance sheet is outdated and useless, and cited as an example the accounting practice of not recognizing many intangible assets. As a specific illustration, the article claimed that the name recognition, reputation, and goodwill of the Coca-Cola trademark are worth over $67 billion, but these assets are not reported on Coca-Cola’s balance sheet.

The article argued that for the income statement, different estimates and methods affect the net income amount. For example, a company may be more optimistic than another, which will result in different expense and net income amounts. An accountant may also choose the straight-line depreciation method, while another chooses accelerated depreciation. These methods will yield different net income amounts.

The article also pointed out a flaw in the statement of cash flows. It stated that comparability of financial information is important in the accounting profession. However, interest paid is listed as an operating activity, while dividends paid is listed as a financing activity. This makes comparability of the performance of companies that make different financing choices (debt versus equity) difficult or even impossible.

You must respond to this attack. Your well-written paper must be two to three pages in length, in addition to the title and reference pages, and be formatted according to the CSU-Global Guide to Writing and APA Requirements. Cite at least two peer-reviewed sources, in addition to the required readings for this module.


Solution preview

Financial statements, the balance sheet, in this case, do not tend to report everything that is used when making decisions about a company. Take, for instance, the reputation, the goodwill, and the recognition of Coca-Cola are useful things that should command the attention of a financial analyst……………………


670 words