Learning area 9 Chapter 13

Chapter 13 Limitation of accounts You should be able to discuss the limitations of ratio analysis at the end of a ratio question for approximately 5 marks. Read through the chapter and be able to link material to Chapter 7 (as indicated on page 11)

Limitation of accounts Historical cost accounting – overstate profits in times of inflation Limitations in interpreting accounts: o Subjectivity e.g. provisions / depreciation / revaluation o Appropriateness – inventory calculated on year end balance more meaningful to use averages o Comparison between firms e.g. inventory valuation / depreciation method…comparable? o Focus on ratio analysis, and not on the AFS as a whole o Accuracy of figures - timing

Limitation of accounts page10 Limitation of accounts page10 How can AFS be manipulated? Depreciation Amortisation Valuation of stock Valuation of liabilities(pension provisions) Revaluation of assets Intangible assets – measurement Omitting contingent liabilities Recognise income too early

Class test Monday 12 May 2014 (During lecture time) Only on Chapter 12 Multiple choice questions and Calculations and theory Total 20 marks 30 minutes