B Com Exam > B Com Videos > Cost Accounting > Limitation of Financial Statement, Cost Accounting
Limitation of Financial Statement, Cost Accounting Video Lecture | Cost Accounting - B Com
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106 videos|173 docs|18 tests
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FAQs on Limitation of Financial Statement, Cost Accounting Video Lecture - Cost Accounting - B Com
| 1. What are the limitations of financial statements? |  |
Ans. Financial statements have several limitations, including:
- Historical information: Financial statements provide information about past performance and do not necessarily reflect current or future conditions.
- Subjectivity: Financial statements involve judgments and estimates, which can introduce bias and limit their accuracy.
- Lack of non-financial information: Financial statements focus on monetary transactions and do not capture non-financial factors such as employee satisfaction or customer loyalty.
- Limited comparability: Different companies may use different accounting policies, making it challenging to compare financial statements across organizations.
- Incomplete information: Financial statements do not always provide a complete picture of a company's financial health, as they may omit certain details or transactions.
| 2. How does cost accounting differ from financial accounting? | |
Ans. Cost accounting and financial accounting differ in several ways:
- Purpose: Cost accounting focuses on providing information for internal decision-making and cost control, while financial accounting aims to provide financial information to external stakeholders.
- Scope: Cost accounting focuses on capturing and analyzing costs within an organization, while financial accounting covers the overall financial performance and position of the company.
- Reporting frequency: Cost accounting may generate reports more frequently, such as daily or weekly, to support real-time decision-making. Financial accounting typically produces periodic reports, such as quarterly or annually.
- Measurement focus: Cost accounting emphasizes the measurement and analysis of costs, including direct and indirect costs. Financial accounting focuses on financial transactions and their impact on the company's financial statements.
| 3. What are some examples of cost accounting methods? | |
Ans. Cost accounting methods include:
- Job costing: This method involves tracking costs for specific projects or jobs. It assigns direct costs to each job and allocates indirect costs based on a predetermined allocation basis.
- Process costing: Process costing is used when products are produced in large quantities and are indistinguishable from each other. Costs are averaged over the total units produced in a particular period.
- Activity-based costing (ABC): ABC allocates costs based on the activities that drive costs in an organization. It identifies cost drivers and assigns costs accordingly.
- Standard costing: Standard costing involves establishing predetermined costs for materials, labor, and overhead. Actual costs are then compared with the standard costs to analyze variances.
- Lean accounting: Lean accounting focuses on eliminating waste and improving efficiency. It involves measuring and reporting costs based on value streams and value-added activities.
| 4. How can cost accounting benefit a business? | |
Ans. Cost accounting can benefit a business in several ways:
- Cost control: By analyzing and tracking costs, cost accounting helps identify areas of inefficiency and waste, allowing businesses to implement cost-saving measures.
- Pricing decisions: Cost accounting provides insights into the costs associated with producing goods or services, helping businesses set appropriate prices to ensure profitability.
- Decision-making support: Cost accounting provides relevant and accurate information to support decision-making, such as make-or-buy decisions, product mix decisions, and pricing decisions.
- Performance evaluation: Cost accounting allows businesses to evaluate the performance of different departments, products, or projects, facilitating effective resource allocation and performance improvement.
- Budgeting and forecasting: Cost accounting helps in developing budgets and forecasts by providing historical cost information and insights into future costs.
| 5. How can financial and cost accounting be integrated? | |
Ans. Financial and cost accounting can be integrated by:
- Allocating costs: Cost accounting provides detailed cost information that can be allocated to different cost centers or departments, allowing for more accurate financial reporting.
- Cost of goods sold calculation: Cost accounting provides the necessary information to calculate the cost of goods sold, which is an essential component of the income statement in financial accounting.
- Inventory valuation: Cost accounting methods, such as standard costing or activity-based costing, can be used to value inventory, which is crucial for accurate financial statements.
- Performance measurement: Cost accounting metrics, such as cost per unit or cost variances, can be used to evaluate performance and make adjustments to financial statements accordingly.
- Decision-making: Cost accounting information can be used in financial analysis to support decision-making, such as investment decisions, pricing decisions, or outsourcing decisions.
Text Transcript from Video
limitations of financial statements so
financial statements with me the
manufacturing account trading account
profit and loss account and balance
sheet these reflect what is the purpose
of the financial statements to let us
know the results of the operating
activities and to tell us what are the
assets and liabilities on a particular
day at the year however the financial
statements also have certain drawbacks
have certain limitations and when we
read financial statements we should keep
these limitations in mind what are these
briefly let us discover what are some of
these limitations historical cost this
is one of the concepts accounting
concepts that we follow that all assets
when we purchase we record them at the
historical cost the cost at which we
bought but over a period of time for
example land acquired 50 years ago for
one lakh of rupees may be worth a crore
today but it would continue to appear in
the books at its historical cost not
really giving a correct picture about
the value of the assets in the
organization so in the balance sheet the
land would continue to be shown at 1
lakh that is why sometimes there is a
revaluation of assets by which we
increase the value of these assets and
create a reserve called a revaluation
reserve how would the reason that we
maintain historical cost is that it is
objective it is not a matter of opinion
it is the actual price for which we
acquired
the asset another drawback of the
financial statements is that it
considers only transactions which can be
valued in terms of money sometimes in an
organization the biggest assets are its
people but the strength of the people
the strength of the management of the
competence of the management etc are not
reflected in the financial statements
that is why there is a new area called
human resource accounting but usually
financial statements are prepared on a
historical basis and only those
transactions which can be measured in
terms of money are considered perpetual
continuity and periodical account a
business following the going concern
concept a business will continue for a
long period of time to come that is the
basic assumption when we prepare
financial statements and because it will
go on for a long period of time this
long period of time is divided into and
years into periods equal variance of one
year each and financial statements are
prepared so that for each year each such
equal period we can assert eight the
profits and we of course know the
financial position as at the end of that
period
as a result when some expenditures at me
some assets are bought we have to make
an estimate about the life of that asset
this may not always be accurate it is
left to the judgment of the management
to that extent objectivity is lost
another disadvantage would be the
different accounting policies valuation
of fixed assets valuation of inventories
valuation of investments etc can be done
in different ways for example as we have
seen in depreciation the straight-line
method of computing the appreciation may
be followed or a written down value
method or an annuity method or the
number of hours of production method etc
so different organizations may have
different accounting policies so also
with respect to valuation of inventories
where the FIFO method or the weighted
average method etc may be one so it is
possible that different policies are
followed by different forms the
financial statements as they are are
fine if we are making them for one
concern comparing the results year after
year for the same business but we when
we compared different organizations in
the same industry or organizations or
companies of different industries
sometimes compatibility is lost because
of these limitations of financial
statements
financial statements with me the
manufacturing account trading account
profit and loss account and balance
sheet these reflect what is the purpose
of the financial statements to let us
know the results of the operating
activities and to tell us what are the
assets and liabilities on a particular
day at the year however the financial
statements also have certain drawbacks
have certain limitations and when we
read financial statements we should keep
these limitations in mind what are these
briefly let us discover what are some of
these limitations historical cost this
is one of the concepts accounting
concepts that we follow that all assets
when we purchase we record them at the
historical cost the cost at which we
bought but over a period of time for
example land acquired 50 years ago for
one lakh of rupees may be worth a crore
today but it would continue to appear in
the books at its historical cost not
really giving a correct picture about
the value of the assets in the
organization so in the balance sheet the
land would continue to be shown at 1
lakh that is why sometimes there is a
revaluation of assets by which we
increase the value of these assets and
create a reserve called a revaluation
reserve how would the reason that we
maintain historical cost is that it is
objective it is not a matter of opinion
it is the actual price for which we
acquired
the asset another drawback of the
financial statements is that it
considers only transactions which can be
valued in terms of money sometimes in an
organization the biggest assets are its
people but the strength of the people
the strength of the management of the
competence of the management etc are not
reflected in the financial statements
that is why there is a new area called
human resource accounting but usually
financial statements are prepared on a
historical basis and only those
transactions which can be measured in
terms of money are considered perpetual
continuity and periodical account a
business following the going concern
concept a business will continue for a
long period of time to come that is the
basic assumption when we prepare
financial statements and because it will
go on for a long period of time this
long period of time is divided into and
years into periods equal variance of one
year each and financial statements are
prepared so that for each year each such
equal period we can assert eight the
profits and we of course know the
financial position as at the end of that
period
as a result when some expenditures at me
some assets are bought we have to make
an estimate about the life of that asset
this may not always be accurate it is
left to the judgment of the management
to that extent objectivity is lost
another disadvantage would be the
different accounting policies valuation
of fixed assets valuation of inventories
valuation of investments etc can be done
in different ways for example as we have
seen in depreciation the straight-line
method of computing the appreciation may
be followed or a written down value
method or an annuity method or the
number of hours of production method etc
so different organizations may have
different accounting policies so also
with respect to valuation of inventories
where the FIFO method or the weighted
average method etc may be one so it is
possible that different policies are
followed by different forms the
financial statements as they are are
fine if we are making them for one
concern comparing the results year after
year for the same business but we when
we compared different organizations in
the same industry or organizations or
companies of different industries
sometimes compatibility is lost because
of these limitations of financial
statements
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Dec 19, 2024 Last updated |
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