Bed Linens Online Valuation of Inventory – A Limitation on Financial Statements Analysis

Accounting is a system for recording financial information, and has certain limitations. For example, financial statements reports only events which can be expressed in monetary terms.

A second limitation is that the financial statements report events that have happened, whereas we are most interested in what will happen. For example, the fact that a bed linens online business earned $1B last year is not necessarily an indication of what it will earn next year.

Third, the balance sheet does not attempt to show the market value of the assets. Assets are booked at cost, and subsequent changes in market value are pretty much disregarded.

In particular, depreciation is a write-off of cost, not an indication of changes in the real value of assets.

Fourth, the accountant and management have considerable latitude in choosing among alternative ways of recording an event, and this flexibility can in one sense be considered a limitation.

An example of flexibility in accounting is that in determining inventory values and cost of goods sold, the accountant may use either the LIFO or the FIFO method. LIFO is now prohibited to some industries as it is used as a direct tax avoidance scheme.

Also, accounting figures are affected by estimates. In the treatment of the depreciation of fixed assets, for example, one must estimate the useful life of the asset and the resale value (or salvage value or residual value).

Two accountants recording the same set of underlying facts might produce two rather different statements.

Nevertheless, in spite of these limitations, accounting information is ordinarily the most useful way of finding out about a business. This use always involves a comparison of the figures being examined with something else.

For example, we may wish to compare the performance of Wall Treatments Company in a given year with that of a previous year. In an historical comparison of this type we would ask the question “Is the financial performance getting better; or worse?

Also, we may wish to compare the company with other companies, preferably in the same industry. In this case, we ask “How does Wall Treatments Company compare with Blinds & Curtains Co. Inc.?

Finally, we may compare the company with companies in general by using certain rules of thumb which have evolved from experience.

In keeping these comparisons, one should keep in mind the overall objectives of most businesses which are to earn a satisfactory return of the invested funds consistent with maintaining a sound financial condition.

PureComfortLinens.com, the ecommerce outlet of Vicera Enterprises, Inc., a duly registered corporation, offers a wide variety of high quality bedding and accessories for every bedroom in your house. It carries simple and colorful linens, stylish bedspreads, conventional comforters with self corded edge finish, etc., balmy pillows, beautiful pillow cases and other bed accouterments. We have been providing consumers with durability and comfort at reasonable prices.