Question

1. list the usefulness and likitations of a blance sheet - be specific

2. why ars disclosure notes important ? list some examples of items that should be disclosed .

Answer 1

1. USEFULNESS OF BALANCE SHEET

• A balance sheet lists your assets and liabilities. It is helpful in determining risk and return. Because, Comparing your current assets to current liabilities determines whether your business can cover its short-term obligations. Also, it shows if you will be able to pay back debt or not.
• Balance sheet helps stakeholders in assessing your financial position. Most lenders require a balance sheet to determine a business’s financial health and creditworthiness. Additionally, potential investors may use it to understand where their funding will go and when they can expect to be repaid.
• It aids ratio analysis.It indicate a company’s operational efficiency, liquidity, profitability, and solvency. These financial ratios are particularly helpful when assessing the long-term sustainability of a business.

LIMITATIONS OF BALANCE SHEET

• A balance sheet is prepared on historical cost basis. Change in prices have a huge impact and they are not considered.
• Balance Sheet has some fictitious assets, which have no market value. Such items are unnec­essarily inflate the total value of assets.

2. IMPORTANCE OD DISCLOSURE NOTES

• Disclosure Notes provide information about accounting policies, the use of accounting principles, accounting changes etc
• These notes help auditors in forming their opinion about the financial statements and finally providing an audit report
• ITEMS that should be disclosed
• Accounting policies, inventory method, Subsequent events, transaction with related parties, intangible assets