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Chapter 5: 7 (page 237)

What are the major limitations of the balance sheet as a source of information?

Short Answer

Expert verified

Balance information has some limitations because of the historical cost concept, estimations, and eliminating some items having value.

Step by step solution

01

Definition of Historical Cost Concept

The accounting concept established by the authorized board stating that the business entity mightreport all the resources at historical price is known as the historical cost concept.

02

Limitation of Balance Sheet

  1. The line items on the balance sheet are not recorded at fair value. Instead, they are reported at historical cost.
  2. Estimation is used to determine various line items such as allowance for doubtful accounts and the useful life of the depreciation assets.
  3. It does not record all the financial value items. For example, human resources are not recorded on the balance sheet.

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Most popular questions from this chapter

What is the relationship between current assets and current liabilities?

Where should the following items be shown on the balance sheet, if shown at all?

(a) Allowance for doubtful accounts.

(b) Merchandise held on consignment.

(c) Advances received on sales contract.

(d) Cash surrender value of life insurance.

(e) Land.

(f) Merchandise out on consignment.

(g) Franchises.

(h) Accumulated depreciation of equipment.

(i) Materials in transit鈥攑urchased f.o.b. destination.

How does information from the balance sheet help users of the financial statements?

Use the information presented in BE5-14 for Martinez Corporation to compute the net cash used (provided) by financing activities.

BE5-14 (L05) Martinez Corporation engaged in the following cash transactions during 2017.

Sale of land and building $191,000

Purchase of treasury stock 40,000

Purchase of land 37,000

Payment of cash dividend 95,000

Purchase of equipment 53,000

Issuance of common stock 147,000

Retirement of bonds 100,000

Compute the net cash provided (used) by investing activities.

Using the information in BE5-14, determine Martinez鈥檚 free cash flow, assuming that it reported net cash provided by operating activities of \(400,000.

BE5-14 (L05) Martinez Corporation engaged in the following cash transactions during 2017.

Sale of land and building \)191,000

Purchase of treasury stock 40,000

Purchase of land 37,000

Payment of cash dividend 95,000

Purchase of equipment 53,000

Issuance of common stock 147,000

Retirement of bonds 100,000

Compute the net cash provided (used) by investing activities.
See all solutions

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