Identify two items or issues that cannot be derived from the financial statement

Question

Identify two items or issues that cannot be derived from the financial statements of the two companies that you selected for your research. Explain why these items or issues would be of concern to investors and other stakeholders. In your rationale, address the specific interests of the different users of financial statements. Compare and contrast the two companies in terms of how well or how poorly they are performing in the areas of profit, debt, and asset turnover. Use appropriate ratios in your analysis. Indicate strategies for possible improvement in each area.

Companies:

kinder morgan

bank of america

Explanation / Answer

Answer:

There are many issues that cannot be derived from the financial statements:

Inflationary effects. If the inflation rate is relatively high, the amounts associated with assets and liabilities in the balance sheet will appear inordinately low, since they are not being adjusted for inflation. This mostly applies to long-term assets.

Intangible assets not recorded. Many intangible assets are not recorded as assets. Instead, any expenditures made to create an intangible asset are immediately charged to expense. This policy can drastically underestimate the value of a business, especially one that has spent a large amount to build up a brand image or to develop new products. It is a particular problem for startup companies that have created intellectual property, but which have so far generated minimal sales.

Based on specific time period. A user of financial statements can gain an incorrect view of the financial results or cash flows of a business by only looking at one reporting period. Any one period may vary from the normal operating results of a business, perhaps due to a sudden spike in sales or seasonality effects. It is better to view a large number of consecutive financial statements to gain a better view of ongoing results.

Not always comparable across companies. If a user wants to compare the results of different companies, their financial statements are not always comparable, because the entities use different accounting practices. These issues can be located by examining the disclosures that accompany the financial statements.

Subject to fraud. The management team of a company may deliberately skew the results presented. This situation can arise when there is undue pressure to report excellent results, such as when a bonus plan calls for payouts only if the reported sales level increases. One might suspect the presence of this issue when the reported results spike to a level exceeding the industry norm.

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