What are the Limitations of the Balance Sheet?
Static Nature of Balance sheets (con't)
- Balance sheets thus decrease financial flexibility and liquidity, because accountants would have to know about other financial statements that occurred after the first balance sheet occurred
Static Nature of Balance Sheets
- Due to the static nature of balance sheets, they can only capture an operation's financial position at a particular moment. Thus they become outdated very fast.
The Balance Sheet (con't)
Human Resource Investments
- It is vital for creditors and investors to understand the appreciation and depreciation of their assets (property, equipment, & utilities) when buying, using, and selling them
- If the balance sheet is ignored by investors and management it can lead to poor use of the property's assets and less borrowing potential
- The most important aspect to hotels, motels, restaurants, clubs, and other sectors of the hospitality industry are people
- The balance sheet does not reflect on human resource investments
- Firms spend millions recruiting and training to achieve an efficient and highly motivated work force. This is an essential key to a successful business, but is not recorded as an asset
The Balance Sheet
- The balance sheet is very useful, however, income statements are more interesting for external sources (investors, long-term creditors, & management)
- The balance sheet is based on the cost principle, therefore, it often doesn't reflect current values of assets (property & equipment)
Estimates
Items that are commonly estimated include:
- Accruals
- Utilities
- Immaterial Items
- Salvage Values &
- Depreciation Values
Judgement Based
- Balance sheets are not exact, many items on the balance sheet are based estimates. These items show what is expected to be sold. Amounts seen will show the lower of the cost.
- Because estimates are always in error, the balance sheet items will be wrong.