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What is a major limitation of historical cost accounting?
What is a major limitation of historical cost accounting?
Why can the valuation of inventories lead to understated costs of sales?
Why can the valuation of inventories lead to understated costs of sales?
Which concept does NOT represent an alternative to traditional financial reporting?
Which concept does NOT represent an alternative to traditional financial reporting?
What is the effect of increasing inventory values in historical cost accounting?
What is the effect of increasing inventory values in historical cost accounting?
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What is a potential manipulation technique regarding reported figures in company accounts?
What is a potential manipulation technique regarding reported figures in company accounts?
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Which of the following is NOT a feature of financial reporting on sustainability?
Which of the following is NOT a feature of financial reporting on sustainability?
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What challenge arises when interpreting company accounts?
What challenge arises when interpreting company accounts?
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What consequence can result from the understatement of costs of sales in financial reporting?
What consequence can result from the understatement of costs of sales in financial reporting?
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What is one reason why published figures may be misleading?
What is one reason why published figures may be misleading?
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How does the accounting method used affect reported profitability?
How does the accounting method used affect reported profitability?
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What challenge is associated with using past performance as a basis for future predictions?
What challenge is associated with using past performance as a basis for future predictions?
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Why might companies engage in manipulating reported figures?
Why might companies engage in manipulating reported figures?
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Which aspect of financial reporting is considered a limitation due to its inherent subjectivity?
Which aspect of financial reporting is considered a limitation due to its inherent subjectivity?
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Published accounts often fail to provide insight into which of the following?
Published accounts often fail to provide insight into which of the following?
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What factor can complicate the accuracy of current operating income as a profit indicator?
What factor can complicate the accuracy of current operating income as a profit indicator?
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What is a common misconception about the relationship between audits and financial manipulations?
What is a common misconception about the relationship between audits and financial manipulations?
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What is one method for producing a sustainability report?
What is one method for producing a sustainability report?
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Which aspect is typically NOT included in sustainability reporting?
Which aspect is typically NOT included in sustainability reporting?
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What is a key advantage of sustainability reporting?
What is a key advantage of sustainability reporting?
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Which organization is a major contributor to the development of international standards for sustainability reporting?
Which organization is a major contributor to the development of international standards for sustainability reporting?
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Sustainability reports can be an intrinsic part of which type of reporting?
Sustainability reports can be an intrinsic part of which type of reporting?
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Which of the following does NOT represent a category of guidelines provided by the GRI?
Which of the following does NOT represent a category of guidelines provided by the GRI?
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Which stakeholder interest does sustainability reporting primarily aim to consider?
Which stakeholder interest does sustainability reporting primarily aim to consider?
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What type of report would include aspects such as procurement policies and anti-competitive behaviour?
What type of report would include aspects such as procurement policies and anti-competitive behaviour?
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What factors can make the net asset value per share ratio misleading?
What factors can make the net asset value per share ratio misleading?
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Which statement about the current ratio is accurate?
Which statement about the current ratio is accurate?
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In which scenario might the profit margin ratio be misleading?
In which scenario might the profit margin ratio be misleading?
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What situation could lead to a misleading return on capital employed ratio?
What situation could lead to a misleading return on capital employed ratio?
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When is the current ratio considered particularly difficult to interpret?
When is the current ratio considered particularly difficult to interpret?
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Which of the following is a limitation of the net asset value per share ratio?
Which of the following is a limitation of the net asset value per share ratio?
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What is a key issue affecting the interpretation of profit margin for construction businesses?
What is a key issue affecting the interpretation of profit margin for construction businesses?
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Why might a company's current ratio of 0.8 be seen in two different lights?
Why might a company's current ratio of 0.8 be seen in two different lights?
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What is one reason companies produce sustainability reports?
What is one reason companies produce sustainability reports?
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Which of the following is a potential problem of sustainability reporting?
Which of the following is a potential problem of sustainability reporting?
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How can companies improve the credibility of their sustainability reports?
How can companies improve the credibility of their sustainability reports?
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What distinguishes integrated reporting from non-financial reporting?
What distinguishes integrated reporting from non-financial reporting?
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Which option is NOT a benefit of sustainability reporting for companies?
Which option is NOT a benefit of sustainability reporting for companies?
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What should companies do to ensure consistency in their reporting?
What should companies do to ensure consistency in their reporting?
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What resource is highlighted as useful for on-the-go revision?
What resource is highlighted as useful for on-the-go revision?
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What is a characteristic of non-financial reports?
What is a characteristic of non-financial reports?
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Which of the following statements about sustainability reporting can be inferred?
Which of the following statements about sustainability reporting can be inferred?
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Which resource is described as covering one main theme of the course?
Which resource is described as covering one main theme of the course?
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What should students do if they run out of time for practice questions?
What should students do if they run out of time for practice questions?
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What consequence can result from failing to adhere to copyright regulations?
What consequence can result from failing to adhere to copyright regulations?
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What additional materials are suggested for revision besides revision notes?
What additional materials are suggested for revision besides revision notes?
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Which of the following statements is NOT true regarding the use of study material?
Which of the following statements is NOT true regarding the use of study material?
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What is the primary function of the resources like Revision Notes and Flashcards?
What is the primary function of the resources like Revision Notes and Flashcards?
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What is one potential benefit of the Revision Notes mentioned?
What is one potential benefit of the Revision Notes mentioned?
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Study Notes
Limitations of Accounts and Alternative Reporting
- Syllabus objectives include describing different account types, company accounts, and the value of financial reporting regarding environmental, social, and economic sustainability.
- Alternatives to traditional financial reporting are detailed.
- Assessing company accounts and their limitations is discussed.
- Shortcomings of historical cost accounting are explored.
- Interpretation limitations of company accounts are critiqued along with manipulation techniques.
- The introduction details the use of accounting ratios and newer alternatives to the standard financial reports.
Historical Cost Accounting Shortcomings
- Historical cost accounting distorts profits during inflationary periods.
- Inventory valuation has a time lag between purchase and sale, potentially understating cost of sales.
- Depreciation may overstate profits because it's based on historical cost, not replacement cost.
- Interest payments may under or overstate profits depending on the firm's investments and loan capital.
- Consistency over time is hard to compare due to inflation's impact on asset and sales values.
Limitations in the Interpretation of Accounts
- Account limitations depend on their intended use; almost every account number may be suspect.
- Subjectivity is inherent in accounting procedures (inventory valuation, depreciation).
- Appropriateness of figures may depend on the user's needs.
- Comparisons between firms are often difficult due to different accounting methods.
- Accuracy of reported figures is often a problem as they are out of date, based on estimates, or manipulated.
- Going concern method used may not reflect the true value of the company if it faces serious financial trouble.
- Non-current assets are often based on historical cost, not true economic value.
- Intangible assets are often difficult to value.
Reporting on Environmental, Social, and Economic Sustainability
- Sustainability reporting (often non-financial reports) aims to measure and communicate economic, social, and environmental effects of business activities.
- It considers the needs of present and future generations, with a long-term perspective.
- The format is often varied, a non-financial report, or part of integrated reporting.
- Sustainability reports cover environmental (e.g. resource use, emissions), social (workforce, community), and economic aspects (governance, values).
- More recent reporting initiatives (like GRI) and international standards provide guidelines for reporting.
Advantages and Disadvantages of Sustainability Reporting
- Reporting compels organisations to consider future implications of current actions.
- Reporting helps to communicate sustainability visions and strategies.
- Reporting enhances company image and reputation.
- Reporting encourages stakeholder involvement.
- Sustainability reports enhance the company’s image and reputation.
- Sustainability reports attract/retain employees and encourage stakeholders.
- Difficulties of measurement/projection related to reporting.
- Companies may only highlight positive outcomes, not problems.
Creative Accounting and Manipulation (of Accounts)
- Firms may try to enhance their image or manipulate results.
- Accounting practices can be used to enhance a company's image, but it may not reflect its actual financial position.
- Techniques like inappropriate depreciation or revaluation can cause issues and misleading figures regarding profitability or asset stability.
- Transparency and careful scrutiny are vital elements in making sure accounting is accurate.
Alternatives to Traditional Financial Reporting
- Non-financial reporting complements existing financial reports.
- Integrated reporting combines financial and non-financial aspects for holistic view of a company’s performance.
- This combines financial and non-financial factors and the impact of these factors on the performance and prospects of a company
Chapter 15 Summary—Key Points
- Historical accounting methods could overstate or understate profits due to elements like inflation, depreciation , or inventory timing.
- Subjectivity exists in accounting; firms have varied choices of methods.
- Comparability between companies' accounting is difficult due to different accounting formats or practices.
- Creative accounting is a problem for accurately reflecting or interpreting financial statements.
- Other limitations of accounting include considerations of the company’s overall performance, or its management, or stakeholder relations, in addition to purely financial data.
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Description
This quiz explores the limitations of various account types and traditional financial reporting, focusing on environmental, social, and economic sustainability. It discusses alternatives to historical cost accounting and critiques the interpretation of financial statements. Additionally, it delves into the manipulation techniques and concepts such as accounting ratios and their relevance in modern reporting.