The Disadvantages of the Balance Sheet

The balance sheet is one of the financial statements that is commonly released by companies as a way to gauge the financial health of the business. While the balance sheet can provide you with valuable information, it is not the only statement that you need to pay attention to. It has a few limitations to be aware of. Read more: The Disadvantages of the Balance Sheet | eHow.com http://www.ehow.com/info_10006624_disadvantages-balance-sheet.html#ixzz2Loo1V4j4

Snapshot

One of the potential disadvantages of a balance sheet is that it is only a financial snapshot of the condition of a company. This means that it only take into consideration what is going on that moment with the business. It does not necessarily take into consideration the long-term prospects of a business. For example, a company that is developing a revolutionary new technology may not have a particularly attractive balance sheet, but it will be making a large amount of revenue in the future.

Value of Business

Another potential disadvantage of using a balance sheet is that it does not tell you the accurate value of a company. While it does provide you with a figure for shareholders equity, it does not actually tell you how much the company is worth. The shareholders equity should be a minimum value for the worth of a company. To value a business, you must take into consideration several other factors besides how much the equity is for the shareholders.

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Financial Ratios

When analyzing a balance sheet, you may use financial ratios to determine the financial health of a company. Many of the financial ratios that are used by analysts are compared with information on other financial statements, such as the income statement and statement of cash flows. If you are only looking at the balance sheet, you will not be able to compare the financial ratios to the data on other financial statements. This gives you an incomplete picture of the company's health.

Only Financial Factors Considered

One of the potential problems of using a balance sheet to evaluate a company is that it only looks at financial factors. For example, it only looks at the dollar value of the physical assets that a company has. It does not take into consideration any of the other factors that could add value to a business. For example, a company may have a strategic partnership with

another business that is worth a lot to the success of the company. It does not take into consideration the intellectual capital of the business either.

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What are the limitations of a balance sheet?

Answer
Petty cash is often a small amount of discretionary funds in the form of cash used for expenditures where it is not practical to make the disbursement by Check. The most common way of accounting expenditures is to use the imprest system. The initial fund would be created by issuing a check for the desired amount. Usually $100 would be sufficient for most small business needs; however, larger businesses may have several thousand dollars in discretionary funds available as petty cash. The entry for this initial fund would be to debit Petty Cash and credit cash. Added 12/30/2010: In the United States, most financial statements report historical information; that is, they provide financial information about years that are over and done with, and that information might not be a good indicator of how well the firm will do in the future, especially if the firm is relatively new. Accordingly, financial statement users are expected to be sophisticated enough in accounting, finance and business to know how to analyze them.

What Are The Advantages And Disadvantages Of Balance Sheet?

Within financial accounting, a balance sheet refers to a summary of the financial balances of a company. Using balance sheets can have both its advantages and disadvantages. The advantages include full disclosure and ratio analysis while the disadvantages can include value discrepancies and transparency. A standard balancesheet is made up of three parts: Assets, liabilities and ownership equity. These are all listed as of a specific date, such as at the end of the companys financial year. Full disclosure is one of the main purposes for balance sheets or financial statementsand is also one of its main advantages. It is now a requirement, made by the Securities and Exchange Commission, that all public companies must make a 10K report. This 10K report must include a full disclosure of all financial statements, all detailed with notes explaining all assumptions. The details of a companys spending are available to the public and, in theory, It should stop companies from claiming any spending in a way that they shouldnt. Balance sheets and financial statements are advantageous for the data that

is needed to conduct a thorough ratio analysis. The fact that they are based on a system that is not market based, the accrual system of accounting, is an advantage in the sense that it is good to have a basis for comparing book value to market value. It also helps pinpoint any bargains the in the market. Disadvantages with balance sheets can be due to value discrepancies. These make it difficult to know the real value of assets within a balance sheet or financial statement and this, in turn, can translate into unreliable ratios. A bigger disadvantage with balance sheets is the transparency of them. As they are reasonably easy for anyone to understand, this does make it easy for people to hide information, even with a full disclosure. Analysts will need to study the cash flow in detail and check where cash flow is coming from or going to.

Best Answer
Advantages: I. By comparing past balance sheets with the present balance sheet, the growth or decline of the business assets, loans and net worth can be determined. Ii. The balance sheet is used to calculate ratios, such as the current ratio, acid test ratio, leverage ratio. These ratios are used to evaluate the financial performance of the business. Iii., The owner may need to negotiate a long-term loan on the basis of non-current asset values. Disadvantages: I. Does not give accurate picture on real time basis since outdated valued of assets are used.

What are the main limitations of balancesheet

There is no doubt that every business prepares balance sheet at the end of each accounting period yet it suffers from the following limitations:

Some of the current assets are valued on estimated basis, so the Balance sheet is not in a position to reflect the true financial position of the business. Fixed assets are shown in the Balance sheet at original cost less depreciation up-to-date. Thus Balance sheet does not show true value of assets. Balance sheet can not reflect those assets which cannot be expressed in monetary terms such as skill, honesty and loyalty of workers. Intangible assets like goodwill are shown in the Balance Sheet at imaginary figures which may bear no relationship to the market value.

Statement of financial position or Balance sheet is the essential part of the complete set of financial statements. It is also one of the most sort after source of information for the users of financial statement for decision making purposes. It provides an insight into the financial status of the entity and can also provide vital information regarding the ability of the entity to stay in the business. However, statement of financial position or balance sheet has limitations associated with the information contained in this financial statement. Although the limitations are situation dependent and their effect depends on the number of factors including the degree of reliance placed solely on the balance sheet but there are few limitations which exist in almost every statement of financial position. Some of the important limitations are discussed below: 1. Although accounting standards, local or international, are made to help management to produce relevant and reliable information but this in itself in many cases prove a limitation. Strict instructions by the standards might not be a perfect fix for every situation and might push management to report something which is not that much meaningful as it should be. 2. Balance sheet alone do not provide all of the information needed and you might have to look for ancillary information in other financial statements. For example to conduct ratio

analysis you need figures from other financial statements as well.

3. It does list down the asset business has but it does not tell how much money those assets can generate in the future 4. Information is based on the past and might provide little help about the future. 5. Most of the values reported in the statement of financial position is based on historical cost basis i.e. the item is reported on the basis of valuation conducted when the transaction took place instead of the current basis of valuation and thus information might be too old to be relevant and reliable for decision making purposes. This might limit your ability to understand the current worth of the business. 6. Many assets which are internally generated are not recorded and reported in the balance sheet which limits the pure projection of entitys capability to generate cash and cash equivalents. This is because the assets which do not fulfill the recognition principle will not be reported in the balance sheet. Because of this, person looking at the balance sheet might not get the complete understanding of entitys strengths. 7. One of the major limitations of balance sheet and any other financial statement is that only such information reported which can be quantified easily or at least reasonably. Vital qualitative information is left out almost completely! 8. Statement of financial position relies on the other financial statements and many of the numbers arepulled from income statement or statement of changes in equity etc and thus any mistake, deliberate or not, in those financial statements will ultimately effect the balance sheet as well. Also the limitations of those other financial statements are

also inherited by the balance sheet. Moreover, each financial statement cannot be considered in isolation and taken separately from other financial statements. Doing so might render useless and inaccurate information and interpretation about the entity. 9. Many of the elements are reported on aggregate basis for which even the notes to the financial statements might not provide the complete and relevant information to understand what is included in the figure reported and what is the value of each item included in the total figure. 10. Many of the items reported involve the use of estimation which might not be suitable and user might be interested in knowing how such estimates have been made and whether such estimates are still relevant after the financial statements have been published. 11. The off-balance sheet financing tactics employed by those responsible to prepare financial statements seriously impairs the use of balance sheet as a reliable source of information for decision making purposes. 12. It is not possible for the management to incorporate and report the effects of changing socio-economic circumstances in the financial statements and thus the numbers in the statement of financial position might not be an accurate representation in a given set of conditions surrounding the entity. This becomes even more important if the entity is operating in a politically or economically volatile environment.