Limitations of Accounting Data - Business Finance - ثاني ثانوي

3.11 Limitations of Accounting Data When formally prepared and presented, financial statements appear to be very objective and thorough. However, financial reports have some inherent weaknesses as well (see Figure 3.13). Understanding these will help you to make use of these statements and evaluate them more critically. Link to digital lesson www.en.edu sa 2 Four of the most common weaknesses in financial reporting are: ■ First, performance is measured solely in terms of money, rather than qualitative effectiveness. A relationship probably does exist between performance and superior financial statements. The strong financial statements of Saudi Aramco and Saudi Basic Industries, for example, mirror the quality of their management and staff. However, many firms may be able to improve their financial position temporarily and achieve short-term superior performance that cannot be maintained. ⚫ Second, accounting statements that are available to the public often give combined, rather than individually itemized, data, which may hide important information that the investor or securities analyst could use in studying the company. ⚫ Third, the valuation of assets by the lower of either cost or market value may result in biased information if the Riyal value of the assets has significantly risen (as may occur during periods of inflation). Such وزارة التعليم FIGURE 3.13 Limitations of Accounting Dala CHAPTER 3 Analysis of Financial Statements 121

% M+ 9 increases in value are hidden by the use of the historical cost, and thus the accounting statements do not give a true indication of the current value of the firm's assets. • Fourth, accounting data may not be accurate or sufficiently challenged by auditors. The accounting statements of publicly held firms must be audited annually by an independent certified public accountant (CPA), as regulated in Saudi Arabia by SOCPA. The CPA issues an "auditor's opinion" that attests to the fairness of the financial statements and their conformity with the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The auditors, however, may lack knowledge in specific areas and accept management's data, or may not challenge presentations of gray areas, which are open to interpretation. Thus, the financial analyst or investor should realize that audited financial statements are not absolute truths but include judgments that may affect the accuracy of the financial statements. 9 446 117 8802 98) 777 1 870 164 413 -40% 880 327 MU +X 108 523 97258 15 685 56 145 17 810 589 614 109 115 121 786 4223 14 370 323 871 538 340 938 390 1820 168 332 433 1 602 537 1 448 502 11 487 16 014 557 674 603 175 onk Can Deport + 555 20 1325 771 4.556 I 358 4223 3 305 415 What are some of the limitations of 18 200 1565 36 1 686 260 accounting data? 1 456 212 31674 1371 198 1 371339 Ofer Sink Acc Dessut The

Exercises Choose the correct answer. 1. Accounting statements that are available to the public provide individually itemized data, which may give all-important information that the investor or securities analyst could use in studying the company. True/False 2. Which of the following can be considered weaknesses in using accounting statements? a. Performance is measured in money, rather than qualitative assessment. b. Data provided by management may not be sufficiently challenged by independent auditors. c. Accounting data may be biased and not give a true reflection of the current value of assets. d. All of the above are true. وزارة التعليم " CHAPTER 3 Analysis of Financial Statements 123