Choice of Depreciation Method and Assu ...
Financial statements and the ratios derived from them may be significantly impacted by... Read More
The balance sheet can provide very useful information to users of financial statements. It, however, has several limitations.
The balance sheet gives insight into a company’s financial condition at a particular point in time. It reflects the resources that are controlled by the company as well as how these resources were financed.
The balance sheet can assist analysts in assessing a company’s ability to:
Question
Which of the following statements is incorrect?
- Items on the balance sheet are not measured in the same manner.
- The balance sheet cannot assist in assessing a company’s ability to meet future debt obligations.
- An analyst can use the balance sheet to assess a company’s ability to pay for its short-term obligations.
Solution
The correct answer is B.
This statement incorrectly states that the balance sheet cannot assist in assessing a company’s ability to meet future debt obligations. This is not correct; the balance sheet can assist in assessing a company’s ability to meet its future debt obligations as well as pay for its short-term obligations (Option C).
Option A correctly states that items on the balance sheet are not measured in the same manner; some are measured at historical cost, while others are measured based on their current value.