Issues in Measuring Profit and Financial Position (Byte Size)
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Issues in Measuring Profit and Financial Position (Byte Size)

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The measurement of profit and financial position is not as precise and objective as you may, at first, imagine. In order to prepare the profit and loss account and balance sheet, we have to employ estimates and assumptions. As a result, the portrayal of the financial health of a business can vary according to the particular estimates and assumptions that we make. There are three measurement areas that are critical to the measurement of profit and financial position: depreciation, stock valuation and the problem of bad and doubtful debts. In this course we examine each of these areas in turn.

By the end of this course, you should be able to:

  • explain the concept of depreciation  
  • explain the main methods of depreciation and make appropriate calculations
  • explain the various approaches to stock valuation and make appropriate calculations
  • illustrate how different stock valuation methods impact on the calculation of profit  
  • explain how a business should account for bad and doubtful debts  
  • adjust the financial statements to reflect bad debts and changes in the provision for doubtful debts  
  • discuss the role of subjectivity in the measurement of profit and financial position