Question

Miscalculations of both financial statements can lead to poor allocation of resources as well as poor cost control. It can lead to an incorrect evaluation of the business with incorrect financial ratios such as profitability ratios, operating margin, and profit margin. Miscalculations on the income statement leads to miscalculations on the operating activities on the cash flows statement.

What does everyone think about this statement? Do you agree or disagree?

Answer 1

Yes, I do agree with the statements. A proper ,well- calculated financial statements can help in financial decision making and understanding the current financial position of the firm. On the other hand, miscalculations can lead to following:

• Poor allocation of resources :Suppose there is a miscalculation in net profit and manager's commission is 5% of net profits. Then, in this situation the net profit is appropriated wrongly in manager's account.
• Poor cost control : Until and unless the firm knows actual cost due to miscalculation, it can not ascertain which cost centres to take care of on priority basis. Thus, poor cost control in the firm.
• Incorrect Business Evaluation : With wrong figures in financial statements, the financial analysis ratios like operating ratio, return on investment ratio is ascertained incorrectly. ROI is one such ratio, that is on close scrutiny with the investors. So, if the business is not evaluated properly, then the investors might withdraw their funds from the firm.
• Miscalculation in the operating activities in cash flow : Real cash flow balances will not match if there's a miscalculation in income statement.

Therefore, attention is to paid while calculating and preparing financial statements as it may lead to improper analysis for decision making.

Hope it helps. Thankyou!