Typical Problems with Financial Information

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  • 0:01 Financial Information Defined
  • 0:39 Financial Statements
  • 0:57 Problems with…
  • 4:14 Lesson Summary
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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

The ultimate goal of an accounting professional is to provide accurate and reliable financial information to interested parties. In this lesson, we are going to discuss typical problems with financial information.

Financial Information Defined

Have you ever heard the term 'financial information'? I'm sure that most of us have. The term financial information, in the accounting industry, refers to information found on the financial statements of a company that tells how well or badly a company is performing.

Now that you know what it means, do you have any idea why financial information is important? Financial information, as seen on the financial statements, gives users of this information, which is usually creditors, investors, and potential creditors and investors, the tools they need to make informed decisions about their interactions with the company.

Financial Statements

The financial statements provide all of a company's financial information. They are the income statement, the statement of retained earnings, the balance sheet and the statement of cash flows. Together, these reports tell the story of how well a company is operating and how much of a risk investing in that company would be.

Problems with Financial Information

Reporting Errors

Sometimes, there are problems that occur when creating the reports that provide the financial information. Some of the most common problems that occur in the reporting process are reporting errors. Reporting errors are errors that are a result of such things as miscalculations or transposing numbers. For example, let's say that Henry is the bookkeeper for Wasabi International. While calculating the net income for the company, Henry added $5,000 that really should have been subtracted from the company's income. This miscalculation means that the net income for the quarter is overstated by the $5,000.

Disagreements in Judgment

Another problem that may occur when deciding what to include on the financial reports involves disagreements in judgment. Now, this term should be pretty self-explanatory. In simple terms, it means that what I believe and what you believe may not be the same. I bet you're wondering how this can possibly have anything to do with financial information. Well, let's look back at Henry and another situation he has run into when preparing the financial statements.

Wasabi International recently had to replace a machine that's used on the production line. The terms for the purchase of the machine are for the company to pay half of the cost upfront and the balance when the machine is completely installed. Henry decides that he needs to report the portion of the expense in this accounting period that was actually paid out. His supervisor, Mark, wants to wait and report the expense in another accounting period. Either option is acceptable. However, there will be a difference in the net income reported on the income statement, as well as the information on the statement of cash flows.

If Henry reports the expense now, the net income will be less and the cash outflow will be a whole lot more. But if he waits to report the expenses until the next accounting period when the machine installation is complete, the current period will show a better net income and less cash outflow. Most of the time, disagreements in judgment are related to the timing that the expenses are reported.

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