4. Limitations of Financial Reports

Question 1

Normalised Earnings

Answer 1

Earnings adjusted to take into account cyclical fluctuations in the economy, or adjusted to remove one-time influences leaving only the normal income sources on the BALANCE SHEET.

They help business owners and other stakeholders understand a business’ true earnings from its normal operations.

Question 2

Capitalising Expenses

Answer 2

Costs incurred when financing a non-current asset (e.g. purchase of a factory site would involve payment for legal fees)

They are recorded as an asset on the BALANCE SHEET rather than an EXPENSE ON THE INCOME STATMENT.

Question 3

Valuing Assets

Answer 3

Valuing the asset on the BALANCE SHEET as either its historical (original value of the asset) or depreciated value (value after a certain period of time - whether it has been increased or decreased).

Question 4

Timing Issues

Answer 4

Accountants may adjust the timing of revenue inflows or debt repayments to make the business appear more profitable (e.g. delay banking revenue to avoid higher tax).

Question 5

Debt Repayments

Answer 5

For some financial statements (e.g. BALANCE SHEET) it is difficult to see when the debt has been repaid, how much has been repaid and how much remains.

Question 6

Notes to the Financial Statements

Answer 6

Additional information normally at the end of the financial report.