Acct3302 Financial Statement Analysis For Assessment Answers

Write the Recognition of liabilities and its impact on overstatement of profit.

Answer:

Recognition of liabilities and its impact on overstatement of profit:

The payment of liabilities is made through economic benefits in the form of services, products and cash.

Liabilities are depicted under the liability side of the statement of financial position, which include mortgage, accrued expenses, deferred revenue and accounts payable.

There needs to be reliability in the obligation value and probability in the resource outflow

The liabilities are needed to be gauged effectively and they need to be detected under the financial statements.

Identification of liability needs to be taken into account, if there is a probability that the organisation would be obliged to settle the same.

Consequences if accounting fails to capture the information:

The International Accounting Standards Board (IASB) denotes that transactions need to be realised at fair values.

In case, there is inappropriate recognition of liabilities, it would have direct effect on the decision-making process of creditors, clients, shareholders and potential investors.

In case, the value of liability is depicted at greater or lower value, it would have impact on the current ratio of the organisation.

In case, the liquidity ratio is wrong, it could not be used to compare with that of the competitors.

The management of the organisation might not be able to make effective decisions, as they could not carry out the necessary adjustments within limited timeframe.

Bank loan compels an organisation in paying instalments in fixed duration coupled with interest.

Current liabilities are created for short timeframes for less than a year.

In case, non-current liability is realised as current liability, it would minimise the existing profits.

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