Question

What decisions would be difficult to take on the basis of just the information reported in their balance sheet?

Answer 1

BALANCE SHEET IS A PART OF 'FINANCIAL STATEMENTS`.

Financial statements include Profit and Loss a/c ,cash flow statement and notes to account

Profit and loss helps us understand operating result of a company in detail(Which can not be understood by Balance Sheet).Profit and loss helps us understand what forms significant part of cost and revenue(Which can not be understood by Balance Sheet).Therefor decision on cost cutting or increasing sales can not be taken from balance sheet.

Here operating Decisions are affected

Cash flow statement helps us understand the sources of cash used or generated from different activities viz. operating,investing and financing activities.(Which can not be understood by Balance Sheet).Thus it can not be determined wheter operating cash flow of company are positive or not.Cash flows are also used in investing decisions.

Thus only balance sheet will also hinder investing decisions.

A company only declares dividend after knowing its profitablity of past few years and upcoming trends.If a company pays excess return company will have to suffer from lack of resources and if company pays less return .The investors will withdraw their money.These decisons can`t be taken solely on the basis of balance sheet.

HENCE IT ALSO AFFECTS FINANCING DECISIONS

A decision should never be based on information found on one lone financial statement, because one financial report will not provide the complete information needed to make the best decision possible. It would not provide the decision-maker a view of the entire financial condition of its business.

All financial statements are based on historic financial data. Therefore, it is important to understand that any decision made will be based off trends that may never occur in the future. Henceforth, anyone making a decision with the use of financial statements should be aware it is merely guide and business happens in real-time and other economic conditions could cause businesses to miss their mark.

A company’s goals, sales or earnings forecasts, and measuring business performance are all things that can be determined with information from financial statements along with an understanding of best business practices and market trends.