Limitations of financial statements:

• What type of information is used to prepare financial statements such as the Income Statement and Balance Sheet?

  Historical information
• Match the common window dressing technique with its purpose:

  Deferring expenses ↔️ Boost current profitability

  Early revenue recognition ↔️ Inflate current revenues

  Asset valuation adjustments ↔️ Reflect market value

  Stock buybacks ↔️ Increase earnings per share
• The lack of comparability in financial statements arises from differences in accounting policies
• Auditors may face pressure to provide a favorable opinion, compromising their independence and objectivity
• Audits are unlimited in scope and can uncover all potential issues in financial reporting.

  False
• What is a key limitation of using historical data in financial statements?

  May not reflect current performance
• Financial statements do not include non-financial information, such as customer satisfaction or employee morale
• Window dressing techniques are used by businesses to improve the appearance of their financial statements
• Adjusting the book value of assets to reflect market value is called asset valuation adjustments
• What is the benefit of financial statement comparability over time?

  Assessing business performance
• What can reduce the ability to compare a company's financial statements across different periods?

  Policy changes
• Auditors may face pressure to provide a favorable opinion, compromising their independence and objectivity.

  True
• Match the impact of inflation with its description:

  Increased costs ↔️ Higher prices of inputs

  Reduced purchasing power ↔️ Less real buying ability
• Inflation rates are uniform across all industries, making comparisons straightforward.

  False
• Changes in a company's accounting policies improve its ability to track trends in financial performance.

  False
• Financial statements based on past data may not reflect current or future performance
• Order the common window dressing techniques from those used to improve profitability to those used to enhance stock value.

  1️⃣ Deferring expenses

  2️⃣ Early revenue recognition

  3️⃣ Asset valuation adjustments

  4️⃣ Stock buybacks
• The lack of comparability in financial statements makes it easier to assess a business's true financial health.

  False
• Auditing limitations refer to the inherent constraints of financial audits in providing a comprehensive assessment of a business's performance
• What type of evidence do auditors rely on for their opinion?

  Audit evidence
• Historical financial statements account for changes in market conditions or strategic shifts.

  False
• Why is customer satisfaction important as a non-financial metric?

  Indicates repeat business
• What does deferring expenses involve as a window dressing technique?

  Delaying expense recording
• How do stock buybacks increase earnings per share?

  Reduce outstanding shares
• The lack of comparability is a key limitation of financial statements.
• Match the limitation with its benefit:

  Differences in accounting policies ↔️ Assess performance over time

  Policy changes over time ↔️ Compare against peers
• What should audits be considered alongside when analyzing a business's financial performance?

  Other sources of information
• To account for inflation, the replacement cost formula is $Replacement Cost =$$Historical Cost × (Current Price Index / Historical Price Index)$Current Price Index.
• What is the primary limitation of financial statements in predicting future performance?

  Based on historical data
• Steps to adjust financial reporting for inflation:

  1️⃣ Calculate current price index

  2️⃣ Determine historical price index

  3️⃣ Apply the replacement cost formula

  4️⃣ Adjust asset values

  5️⃣ Update financial statements
• Financial statements account for changes in market conditions or strategic shifts.

  False
• What type of information is excluded from financial statements such as the Income Statement and Balance Sheet?

  Non-financial information
• What is a key limitation of financial audits in providing a comprehensive assessment of a business's performance?

  Auditing limitations
• What may auditors face that compromises their independence and objectivity?

  Pressure to provide favorable opinion
• Financial statements are prepared using historical information, which limits their predictive
• What is a benefit of using historical financial statements?

  Comparing performance across periods
• Non-financial data like employee morale can impact future profitability and solvency.


  True
• Early revenue recognition is a window dressing technique that inflates current revenues.

  True
• Differences in accounting policies between companies can lead to a lack of comparability.


  True
• Differences in accounting policies between companies enhance the comparability of their financial statements.

  False