Question

Identify two (2) pieces of information not included in the principle financial statements (balance sheet, income statements, financial ratios) that you think would be important to someone considering whether to invest in your company. Explain your reasons for believing that this information would be important in making an investment decision.

Answer 1

1. Contingent Liability : Contingent liabilities are those liabilities which may or may not crystallize into admitted liabilities. Examples, impending large payouts pertaining to ongoing lawsuits against the company. There might be lawsuits against the company, which if decided in favor of the plaintiff, could force the company to close down. This is relevant information, which, if suppressed, can lead to investors making incorrect decisions as to whether they want to invest or to remain invested.

If this piece of information is not available in the financial statements or the notes to accounts, investors might end up making incorrect economic decisions.

2. Obsolete inventory : If the obsolete inventory has neither been written off, nor brought to the attention of the users of the financial statements, profits would be overstated, and the inventory value would be overstated. Therefore total assets are overstated, and the potential investor might end up making erroneous decisions.

3. Impairment losses: If assets are impaired, impairment loss needs to be recognized. If not, profita are again overstated.