UNDERSTANDING ACCOUNTING TALK 6: Uses of a Balance Sheet

Nonaccountant corporate managers and employees, when reading and appreciating the Financial Statements of their corporate employer, should check if these actually give accurate feedback on past events, have useful predictive value on which to base decisions for the future, are timely (note the “as of x x x” caption of the Balance Sheet and the “for the period ended x x x” caption of the Income and Cash Flow Statements), and are unbiased (faithfully reflecting the upside as well as the downside of the results of operations and management decisions).

Owners of small businesses and those who construct Financial Statements of their own respective personal finances enjoy more flexibility. While the same credibility / reliability / practical values should be respected, it should be kept in the back of one’s mind that Financial Statements can be used (and have often been used) as a form of public relations ploy and as enticements for financial institutions to lend, investors to put in funds, and suppliers to extend credit.

Without being downright dishonest and inaccurate, Financial Statements can be used to present the best aspects of a business or one’s own financial status. In later posts, when we go into the nitty-gritty of accounting, we will be demonstrating how this can be achieved without breaking any of the International Accounting Standards.

Financial Statements are like clothes. They evoke first impressions. They can enhance what is best or mask the not-so-good parts. They can also heighten defects and make obvious the weak points. In clothes, as in Financial Statements: they can either make or break you.