Limitations of Accounting Profits in the Measurement of a Company’s Success
Measures of accounting at times may not be the best when it comes to calculating and determining a company's achievements. The following reasons explain why it's not efficient. First is due to its single period measure (Capie and Billings 2001:226). Any measure that has a single period is prone to be tampered and manipulated with. This is specifically when the additional benefits are dependent on getting the target for the end of the year. Furthermore, when the company's revenue is presented, this may tamper with the company's performance for the next year. Another reason that makes accounting profits unsuitable for measuring a company's success is that it is not capable of quantifying possessions as well as events that lack financial worth.
As far as measuring of a company's achievements is concerned, any factor whether it is deemed important or not important, cannot be put in terms of money, cannot be useful when dealing with accounting. Furthermore, qualities within the company for instance total trustworthiness and a good reputation cannot be useful during the preparation of a balance sheet as well as the income statement (Capie and Billings 2001:249). Another limitation is the lack of evaluation in the future. The accounting profits only present the position the company is in terms of its finances on the preparation date. Since the statements prepared are needed for future purposes in order to evaluate a company's performance, it will not be useful in the scenario. Moreover, due to the fact business is prone to changes; accounting cannot be helpful because it only gives results for particular dates, for instance, the date prepared.
Another factor is about historical costs. Accounting mainly uses costs from the company's past activities in order to determine the company's value. However, this fails to consider the possibility of other factors influencing the process. These factors include; inflation, changes in prices of the company's products in the market among other factors. In accounting, at times the values might be approximated in order to acquire exact amounts. However, the estimated value is dependent on the person doing the calculations. This basically means that they depend on the accountants feeling of the future events and how they will impact the company. Next is that it is not error-free in that its degree of correctness is not guaranteed. The accountant is the only person that can assure that the statement is error-free and therefore cannot be certain about the company's future prosperity.
Another limitation of accounting profits is the fact that it is full frauds as it is calculated by humans. Due to the fact that human beings are prone to errors and making mistakes, there will always be a chance that they manipulate the data to suit their interests and cover their actions by fixing the accounts. This makes the accounting profits not be suitable for the measurement of the company's achievements as the accounts may be incorrect (Olsen and Young 2014:260). Next is the ability to provide inadequate data needed by the company. Due to the fact that accounting gives the company's whole financial activities and its inability not to provide data on the single activities like information about products and the various departments within the company, it makes the accounting not suitable for determining a company's achievements. In any company that uses accounting, there is a possibility that its costs cannot be controlled.
This is due to the fact that the costs can only be identified at the end of the financial year or can be determined after a particular time stated by the company, makes the company do note as costs are not presented (Olsen and Young 2014:254). In other words, if the accounts and the managers realize that at a particular time the costs are higher, they are incapable of controlling it. Another disadvantage of accounting profits is that it is hard and complex to fix the price of a product. This is because the overall cost of the merchandise can only be determined if and only if any other expenses that are related to the merchandise have been calculated. Accounting is a complicated and hard course, only a few people are suited to do the job. An ordinary worker who does not know the elements required in accounts cannot do it. Accounting profits on supplies information in terms of digits. This makes the information unable to give the data that is required.
Accounting process does not account for opportunity cost. Accounting only gives information about the activities that took place in the past instead of the activities that might occur in the future (Olsen and Young 2014:243). For instance, when the managers of the company wish to determine the end results of the maximum use of their resource, they may not be able to know as accounting does not put into consideration future events. Accountants also attempt to add monetary value to everything and the ones which monetary value cannot be attached to them are not accounted for. The above are some of the reasons accounting profits is not suitable for determining a company's achievements.
Discuss the effect of a substantial rise in interest rates on the investment decision-making process for businesses.
Investment decisions are usually made and determined by the investors and investment managers based on the prevailing market conditions. The analysis should and must be based on the factors attributed to interest rates which are technically responsible for making rational and sound market judgments. The psychological development of interest rates expounds on the manner of expenditure and saving from the target market. Moreover, individuals and entrepreneurs will be able to determine the mechanisms of financing their operations and functions (Krishnamurthy and Vissing-Jorgensen, 2014). However, the choices of investment and establishment of the business are based on the desired decisions which are fundamental to the operations of the business. Therefore, countries with favorable interest rates will attract more investors while the contrary remains true. Therefore, interest rates should encourage investors to establish businesses and making rational borrowing.
For the establishment of the business to be successful, entrepreneurs must be able to make rational investment decisions. These are due to the factors which are attributed by interest rates which govern operations and investments. Interest rates have been considered to have massive impacts on the manner economy operates and functions. Therefore, interest rates influence the direction to which the economy will take. Central banks in respective countries are responsible for setting the target interest rates and the concepts of accepting deposits from the general public (Krishnamurthy and Vissing-Jorgensen, 2014). The whole process is guided and influenced by the monetary policies in the countries involved and considered. These are related impacts of interest rates on the available stocks. Essentially, stocks are the most important part of investments and rational decisions within the operation and management of the business. The impacts may be long-term or short-term in nature depending on the business.
Normally, every investor in the market is bound to make certain levels of risks depending on the operations of the business. The risks should be acceptable depending on the levels and potentials of returns against the potential losses that may be incurred. Usually, when the interest rates are low investment will generate more return to the investor. However, in the circumstances where inflation is high, the investment levels will automatically lose value. Therefore, the stock used for investment will tend to decline and fall in real market value. The investment tends to fall when there are low risks in investment and vice-versa tends to remain true. These effects may be temporary depending on the environment under which the business operates and fundamentally the policies guiding the market. Rising rates of interests mean that the par value will drop while declining rates raises the real value of the stock.
Apparently, when the interest rates are relatively low it makes it possible for many investors to borrow large sums of money. Therefore, the trend makes it possible for cheap and reliable investment in the market and the entire economy. As an investor, one is able to surge the real value of the stock which is used to influence the pattern of investment. The concept remains viable to individuals and groups of investors ready to take risks in the market. However, the interest rates are considered to have serious consequences for the development of the economy. It is used to determine how investment capital is deployed by investors depending on the intentions of the business (Cox et al., 2015). Most of the firms and companies have been considered to experience debts which are used to fund the expansion of the business. The processes allow the productive nature of the business and achieving the real value of the business. The ultimate desire is to increase the return to the business.
Cite this page
Essay Sample on Measuring Company's Success . (2022, Nov 05). Retrieved from https://proessays.net/essays/essay-sample-on-measuring-companys-success
If you are the original author of this essay and no longer wish to have it published on the ProEssays website, please click below to request its removal:
- Accounting Standards in the U.S.
- The Role of Account Subjectivity and Risk of Material Misstatement Paper Example
- Nike Closing at Country Belgium Essay Example
- Accounting Quality - Research Paper
- Essay Sample on Walmart: Enhancing Performance With Supply Chain Technology
- Essay Example on Amazon: Earth's Most Customer-Centric Organization
- Essay Example on Microsoft: Transforming Humanity's Future Through Cloud Tech