Limitations of Accounts and Reporting

Historical cost accounting can inaccurately reflect profits during inflation due to the time lag between inventory purchase and sale.

Companies may understate cost of sales if inventory cost increases between purchase and sale, leading to an overstatement of profits.

Differences between the original purchase price of inventory and its current replacement price can either under or overstate the reported profit when historical cost is used.

Mathematical relationship used to reveal trends.

Inflation can cause historical cost accounting to misrepresent profits by not reflecting the current value of assets and inventory.

Expenses directly attributable to creating and selling products or services during a time period.

Different ways of presenting financial information, beyond traditional methods.

Challenges in accurately understanding the financial health of a company based on reported data.

Manipulating financial transactions to make a company look better than it is, often by delaying expenses or accelerating revenue recognition.

Financial reports become outdated quickly, as the information they reflect is from a past point in time.

Past financial performance may not be a reliable guide to predict future earnings.

Financial reports don't usually reveal a company's future aspirations or strategies.

Financial reports alone don't inherently reveal the ongoing ability to maintain profitability.

Using accounting methods to artificially enhance a company's financial picture.

Manipulating accounting to increase reported profits by overstating sales or understating expenses.

Reducing current profits to artificially increase future earnings, often tied to executive incentives.

A report outlining a company's environmental, social, and economic impacts and performance. It can be a stand-alone document or integrated into broader reporting.

The Global Reporting Initiative (GRI) provides widely used standards for sustainability reporting, encompassing economic, social, and environmental aspects.

Focuses on a company's financial performance, including procurement policies, anti-corruption practices, and competition.

Involves a company's impact on people, such as workforce safety, diversity, training, and consumer privacy.

Addresses a company's impact on the environment, including energy use, water management, emissions, and waste disposal.

Combining financial and non-financial performance information in a single report, including sustainability aspects.

Being open and honest about a company's sustainability performance, giving stakeholders a clear understanding of its operations.

Involving different stakeholders (employees, investors, customers, communities) in the sustainability reporting process.

Helps a company improve its public image, attract and retain employees, encourage stakeholder engagement, and spark competition.

Companies might only highlight positive aspects, making reports less reliable.

Companies should compare their performance against industry standards, maintain consistent reporting, and include areas needing improvement.

Providing information beyond traditional financial figures, like environmental or social impacts.

To offer more transparency to investors, stakeholders, and the public about the company's impact on various areas beyond just financial results.

Accountants need to be involved in sustainability reporting, using skills to measure and assess non-financial data.

A method of accounting where assets and liabilities are recorded at their original purchase price.

HCA can distort profits during inflation because costs are recorded at the original price, not current market value.

Using different accounting methods beyond traditional historical cost to present financial information.

This ratio can be unreliable if asset values are outdated, contain worthless items, or are not easily sold. It's also inaccurate when the company's worth isn't tied to its assets.

The current ratio, which compares current assets to current liabilities, can be misleading when taken alone. It doesn't tell the whole story about a company's liquidity.

The profit margin ratio may not be meaningful for banks or insurance companies because their idea of 'profit' is complex.

The ratio of profit to capital employed can be inaccurate when capital is low, profits are volatile, or asset values are outdated.

Stock turnover measures how quickly a company sells its inventory. Higher turnover usually means efficient operations.

These are companies whose value is primarily based on the skills and knowledge of their employees, not on physical assets.

Construction projects often span several years, so the profit margin may not accurately reflect the full picture of profitability.

This refers to different ways of presenting financial information beyond traditional accounting methods. It can provide additional insights.