The usefulness of the balance sheet
a. No, the focus of accrual accounting, different to cash accounting, gives more accurate information about the company in the financial behavior. The accrual accounting matches the revenues and expenses operation in the generation date and not when there is cash transference. The income statement is more important than the balance sheet because the income statement explains the behavior of the company in the fiscal year and explains the capacity of the company to generate value to stakeholders. The balance sheet gives a "static photograph" of the current situation of the company. Only making the comparison of balance sheets of three or more years is possible to have an idea of the performance of the company. With an income statement is possible to have the performance of the company in a specific moment. The use of accrual accounting may represent challenges to companies that are used to work with cash operations. The delay and failure in account receivables and bill-to-pay accounts affect the control in the operations of the company .
b. The balance sheet is very useful to investors. When the investors want to increase the components of their portfolio, they analyze different opportunities in the market as companies, mutual funds, real estate, commodities, and derivatives. The analysis for companies start in the revision of the financial statements of the company, those are, the balance sheet and the income statement of the company. The balance sheet is very useful to the investors because the balance sheet reflects the assets, liabilities and equity of the company. With the information of the balance sheet, the investor can make calculations of different ratios of liquidity, inventory, returns and compromises of the company. A company with a high enough liquidity to face short-term compromises ensures the company to avoid defaults in the short term. A company with a high rotation of inventory guarantees a high cash flow to the stakeholder of the company. A high value of return on equity and sales establish a relation between the sales and revenues of the company and the assets. A high Return on Equity (ROE) and Return on ASSETS (ROA) tells the company is using its assets in an effective way.
c. The sentence "financial statements are articulated" refers that the financial statements of the company are not isolated but related one to another. The output of the Sales Book and Buy Book is the input of the Diary Book. The output of the Dairy Book is the input of the T Accounts Book. With the two previous books, the income statements of the year are filled. The results of the income statement add revenue in the Balance Sheet at the end of the year. The articulation of the financial statements is the key to the accountability science. Any accountable operation creates collateral in another place of the financial statements.
d. The capital maintenance concept says that profit only takes place when there is a net increase in the assets of the company. For example is possible to have an increase in sales in the income statement, but that operation generates a decrease in inventory. According to the capital maintenance concept, there is revenue if in the sale operation; there is a net increase in the assets, that is: CASH_increase – Inventory_decrease > 0. A second example is the stock sale of the company. If the company gets a higher price than the price in the financial statements, there is a net profit in the operation, according to the capital maintenance concept .
e. The capital maintenance concept may not be consistent with non-profit organizations that require the endowment balances not be lost. The existence of negative earnings or fund investments could create inconsistencies with the assets value according to the capital maintenance concept. The examples are the state law and donors agreements.
Cited Works
Accounting Tools. What is capital maintenance? Accouning Tools. 2013. Web. 05 December 2016
Investopedia. Accrual Accounting. Investopedia. 2015. Web. 05 February 2016
