Within financial accounting, a balance sheet refers to a summary of the financial balances of a company. Using balance sheets can have both its advantages and disadvantages. The advantages include full disclosure and ratio analysis while the disadvantages can include value discrepancies and transparency. A standard balance sheet is made up of three parts: Assets, liabilities and ownership equity. These are all listed as of a specific date, such as at the end of the company’s financial year.
Full disclosure is one of the main purposes for balance sheets or financial statements and is also one of its main advantages. It is now a requirement, made by the Securities and Exchange Commission, that all public companies must make a 10K report. This 10K report must include a full disclosure of all financial statements, all detailed with notes explaining all assumptions. The details of a company’s spending are available to the public and, in theory, It should stop companies from claiming any spending in a way that they shouldn’t. Balance sheets and financial statements are advantageous for the data that is needed to conduct a thorough ratio analysis. The fact that they are based on a system that is not market based, the accrual system of accounting, is an advantage in the sense that it is good to have a basis for comparing book value to market value. It also helps pinpoint any bargains the in the market.
Disadvantages with balance sheets can be due to value discrepancies. These make it difficult to know the real value of assets within a balance sheet or financial statement and this, in turn, can translate into unreliable ratios. A bigger disadvantage with balance sheets is the transparency of them. As they are reasonably easy for anyone to understand, this does make it easy for people to hide information, even with a full disclosure. Analysts will need to study the cash flow in detail and check where cash flow is coming from or going to.
Full disclosure is one of the main purposes for balance sheets or financial statements and is also one of its main advantages. It is now a requirement, made by the Securities and Exchange Commission, that all public companies must make a 10K report. This 10K report must include a full disclosure of all financial statements, all detailed with notes explaining all assumptions. The details of a company’s spending are available to the public and, in theory, It should stop companies from claiming any spending in a way that they shouldn’t. Balance sheets and financial statements are advantageous for the data that is needed to conduct a thorough ratio analysis. The fact that they are based on a system that is not market based, the accrual system of accounting, is an advantage in the sense that it is good to have a basis for comparing book value to market value. It also helps pinpoint any bargains the in the market.
Disadvantages with balance sheets can be due to value discrepancies. These make it difficult to know the real value of assets within a balance sheet or financial statement and this, in turn, can translate into unreliable ratios. A bigger disadvantage with balance sheets is the transparency of them. As they are reasonably easy for anyone to understand, this does make it easy for people to hide information, even with a full disclosure. Analysts will need to study the cash flow in detail and check where cash flow is coming from or going to.
