Balance Sheet and Financial Statement

Balance Sheet and Financial Statement

The balance sheet is one of the financial documents that inform management decisions. It communicates the financial status of an entity to key stakeholders such as lenders and investors. Essentially, the balance sheet reveals an entity’s total assets as well as its total liabilities, the difference indicating the net worth of the entity. For this reason, balance sheets help in tracking company finances so that potential issues are addressed early enough (Sweeney, 2021). Additionally, balance sheets help companies in determining their eligibility for additional credit while potential investors get a better understanding of how their funds will be utilized.

From the above description, the balance sheet covers three key items: a company’s equity, assets, and liabilities. Shareholders need to be provide with accurate information concerning each of these items. When making decisions on which companies to invest in, one of the items that investors typically assess is the fixed assets. Similarly, creditors will want to know a company’s fixed assets before they lend their money to companies (Kenton, 2021). For these reasons, it is very important that companies maintain accuracy in their financial statements. Precisely, the quantity and valuation of a company’s fixed assets must be stated as accurately as possible to avoid misleading shareholders.

There are several ways through accuracy of fixed assets may be ensured. For example, companies must not record fixed assets that are non-existent. The value of these assets must also not be overstated or understated. The recommendation by KPMG (2020) is that assets should be valued at their manufacturing or acquisition costs. More importantly, companies can avoid misleading shareholders by ensuring that any depreciation in value of fixed assets is properly captured in the balance sheet.

References

Kenton, W. (2021). Fixed asset. www.investopedia.com/terms/f/fixedasset.asp

KPMG. (2020). The Swiss law on accounting and financial reporting. https://assets.kpmg/content/dam/kpmg/ch/pdf/explanation-of-the-most-important-provisions.pdf

Sweeney, O. (2021). What are balance sheets and why are they important? www.sage.com/en-ca/blog/what-why-balance-sheets-important/

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