Question

Write a short essay explaining the following statement: “Unfortunately, there are maze like interferences in financial statement data that hinder understanding the valuable information they contain.” Explain what types of information may be missing or hard to find in the financial statements and why the notes are an integral part of the financial statements.

Answer 1

1. The following items make it difficult for a user to comprehend valuable information:

(i) The information is voluminous

(ii) The accounting policies adopted can be confusing and complex

(iii) A unqualified audit report does not imply that all is good

(iv) There is management influence on the presentation of accounting information

(v) There is missing information in the financial statements

(vi) The accounting rules keep changing

2. Missing or hard to find information in the financial statements include the reputation of the firm with the customers ,management effectiveness, the intangible relation of the employees with the management, efficiency and morale of the employees, the provisions for management succession and the possibility risks of changes in external environment that is not in the control of the company. The financial information is usually written in the notes which can be difficult for a user to match and analyze data. Also any complex accounting work done by the company can be hard for a user other than extensive background in accounting to infer the data.

3. Notes to account form an integral part of the financial statements since the information shown in the statements is only a summary of the entire accounting process. The notes contain more details of the financial information, reveal changes in the accounting policies and any significant deviations from GAAP. In depth workings about plant and property, inventory, equipment and investments is revealed in notes. Also information such as the company's future acquisitions, tax liabilities, legal proceedings, stock options, contigent incomes or losses can be seen through notes to accounts.