Limitations of FSs

Question 1

How can seasonal trading distort reporting results?

Answer 1

Many companies whose trade is seasonal, position their year end after their busy period, to minimise time spent on the inventory count

Question 2

Seasonal trading effect?

Answer 2

At one point there’s a a healthy level of cash and low trade payables.

However, a few motnhs prevously trade is slack but fixed costs have to be paid, giving a different picture

Question 3

How can major asset acquisitions before end of accounting period distort reporting results?

Answer 3

SFP shows an increased level of assets and corresponding liabilities, but income earned from utilisation of asset not yet materialised. Negatively affecting ROCE

Question 4

How can the effect of choice of accounting policies distort reporting results?

Answer 4

The accounting policies allow for alternative treatment of items in accounts. e.g. IAS 16 and IAS 20

Question 5

How can changes in accounting policy distort reporting results/

Answer 5

Directs can manipulate the results through change(s) of accounting policies

Question 6

Why do directors manipulate the results through change(s) of accounting policies?

Answer 6

To avoid the effect of an old accounting policy or gain the effect of a new one

Question 7

Problems of historical financial information?

Answer 7

Financial data quickly becomes out of date
Historical data can’t predict future performance
Change in company strategy may have occurred

Question 8

Reducing gearing example?

Answer 8

Paying back a loan just before year end

Question 9

Provisions and FS manipulation?

Answer 9

Creating provisions that are reversed

Question 10

Invoicing and FS manipulation?

Answer 10

Invoicing in advance to boost revenue (cut-off manipulation)

Question 11

Selling an asset and FS manipulation?

Answer 11

Sell asset year-end to realise profit and then repurchase it post-year