Premium Essay

Limitations of Financial Statement

In: Business and Management

Submitted By jiaxin
Words 425
Pages 2
Financial statements are based on historical costs and as such the impact of price level changes is completely ignored. They are interim reports. The basic nature of financial statements is historic. These statements are neither complete nor exact. They reflect only monetary transactions of a business. The following limitations may be noted:
1. The financial position of a business concern is affected by several factors-economic, social and financial, but financial factors are being recorded in these financial statements. Economic and social factors are left out. Thus the financial position disclosed by these statements is not correct and accurate.
2. The profit revealed by the Profit and Loss Account and the financial position disclosed by the Balance Sheet cannot be exact. They are essentially interim reports.
3. Facts which have not been recorded in the financial books are not depicted in the financial statement. Only quantitative factors are taken into account. But qualitative factors such as reputation and prestige of the business with the public, the efficiency and loyalty of its employees, integrity of management etc. do not appear in the financial statement.
4. The rupee of 1995, as for example, does not mean the same as the rupee of 2010. The existing historical accounting is based on the assumption that the value of monetary unit, say rupee, remains constant and accordingly assets are recorded by the business at the price at which they are required and the liabilities are recorded at the amounts at which they are contracted for. But monetary unit is never stable under inflationary condition. This instability has resulted in a number of distortions in the financial statements and is the most serious limitation of historical accounting.
5. Many items are left to the personal judgement of the accountant. For example; provision of depreciation, stock…...

Similar Documents

Premium Essay

Financial Statements

...Financial Statements Patty Reagan ACC/561 September 24, 2012 Bethany Kessel Financial Statements The financial statements of a company give the reader a view of the financial health of the company. The four major reports are the income statement, balance sheet, cash flow statement, and the statement of shareholders’ equity. By understanding the statements and how they relate to one another can help any individual to understand the financial position of the company and will aid in making good decisions when relating to the company. Each report is of importance to the management, creditors, and the investors. Income Statement The gains, revenues, losses, and expenses of a company are listed on the income statement (Johnson, 2012). The money that a company earned from the usual business operations is the revenue. The costs that are associated with earning revenue are expenses. If a company were to sell an asset, it will be considered to be either a capital gain or loss. The amount of net income is found on the cash flow statement as well. This report will be important to investors, creditors, and management. All involved parties want to see if the company is making money or if it is losing money. Balance Statement The balance sheet is a summary of a company’s assets, liabilities, and shareholders’ equity for a particular period (Balance Sheet, 2012). The three segments will give an investor a view of what a company owns and owes and the amount that......

Words: 887 - Pages: 4

Premium Essay

Financial Statements

...Financial Statements ACC/280 July 23, 2011 Cary Schulz, Facilitator Financial Statements Accounting is a critical aspect of any organization; without accounting a business will not be successful. This paper will inform one of the purposes of accounting; the four basic financial statements; how the basic financial statements are interrelated; and why they are useful for managers, investors, creditors, and employees. Accounting is crucial for every business. Purpose of Accounting Accounting is the information system that records, identifies, and communicates an organization’s economic events to interested users (Weygandt, Kimmel, & Kieso, 2008). The definition of financial accounting is the field of accounting that treats money as a means of measuring an organization’s economic performance as opposed to a factor of production. This is comparable to cost accounting (Walden University, 2011). Financial accounting involves the entire system of controlling and monitoring money as it comes in and out of the organization as liabilities and assets; as well as revenues and expenses (Walden University, 2011). Financial accounting pulls together and summarizes the financial data to produce financial reports, such as a balance sheet and income statement for an organization’s investors, lenders, management, tax authorities, suppliers, and other stakeholders (Walden University, 2011). Financial accounting provides financial and economic data for creditors, investors,......

Words: 844 - Pages: 4

Premium Essay

Financial Statements

...called a financial statement. The financial statement lets the person and business know what debits have been taken place in a monthly and yearly time and also credits that have been done in a monthly ans yearly time. There are four types of a financial statement and that is a balance sheet, a profit and loss statement, a statement of a change in equity, and a statement of cash flow. These four types of a financial statement have their own purpose in the accounting field and they are all very important to the businesses and individual people that use each of them. The balance sheet lets the businesses and people that use this sheet know what assets, liabilities, and ownership equity at anytime they need it, monthly, quarterly, or yearly. The balance sheet is also a summary of a sole proprietorship, business partnership, and other business organizations, if companies and businesses need them depending on if there is an audit of the company or needing them for month end or yearly end purposes. A balance sheet usually has assets in one section of the statement and liabilities and net worth in the other section. There are two types of a balance sheet and that is an account form and a report form. The balance sheet for personal use has current assets such as cash flow whether is would be in the checking account and or in a savings account or liabilities such as mortgages, and other debits that go through the account. The profit and loss part of the financial statement......

Words: 1060 - Pages: 5

Premium Essay

Financial Statements

...Financial Statements Paper Angela Carson Acc/280 Principles of Accounting Stephen Willden October 4, 2010 The purpose of accounting is to help users of financial information to understand how a company or individual is functioning in the economy. Accounting takes the financial information of an organization and it identifies records and communicates its economics to the interested parties. There are four basic financial statements. The income statement shows the revenues, expenses and income of a company over a specific period of time. The retained earnings statement summarizes the changes in earnings over a specific period of time. The balance sheet shows a report of assets, liabilities and equity for an exact point in time. The last would be the statement of cash flows which summarizes cash flows in and out of a company over a specific amount of time. The four basic financial statements are interrelated with one another. They should be prepared in a specific sequence. Net income, which is the income statement, is completed first. The net income is needed to help determine the ending balance in retained earnings. The retained earnings statement provides information if there was an increase or decrease during the specific period of time. The end balance from the retained earnings statement is used to prepare the balance sheet. This is where the basic accounting equation, Assets equal Liabilities plus Equity, is used to calculate the balance sheet. The balance sheet......

Words: 382 - Pages: 2

Premium Essay

Financial Statements

...Financial Statements In accounting there are four basic financial statements that are considered standard practice by the generally accepted accounting principles (GAAP). These are the income statement, the retained earnings statement, the balance sheet and the statement of cash flows. While each of these reports is very important in its own regard, they are also intermingled and depend on each other to represent a complete unbiased view of an organizations financial situation. The income statement reports revenues and expenditures for the given period of time. This report is important because it will show net income or net loss for a given period of time. However, not all monies received are considered revenue and not all monies put out are considered expenditures. For example money received from selling or issuing stocks are not considered revenue. The same holds true for dividends, they are not considered expenditures. This period of time can vary from organization to organization. Most reports are shown on a quarterly and annual basis. When the income statement is properly prepared will produce the company's net income. This amount is then transferred to the retained earnings statement. The retained earnings statement shows the income that is retained by the organization. This report not only shows changes but also the reason for said changes. This allows all interested parties to see and understand if there is a significant variation from the previous report.......

Words: 920 - Pages: 4

Premium Essay

Financial Statement

...Consideration of Fraud in a Financial Statement Audit 1719 AU Section 316 Consideration of Fraud in a Financial Statement Audit (Supersedes SAS No. 82.) Source: SAS No. 99; SAS No. 113. Effective for audits of financial statements for periods beginning on or after December 15, 2002, unless otherwise indicated. Introduction and Overview .01 Section 110, Responsibilities and Functions of the Independent Auditor, paragraph .02, states, "The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. [footnote omitted]"1 This section establishes standards and provides guidance to auditors in fulfilling that responsibility, as it relates to fraud, in an audit of financial statements conducted in accordance with generally accepted auditing standards (GAAS).2 .02 The following is an overview of the organization and content of this section: • • • Description and characteristics of fraud. This section describes fraud and its characteristics. (See paragraphs .05 through .12.) The importance of exercising professional skepticism. This section discusses the need for auditors to exercise professional skepticism when considering the possibility that a material misstatement due to fraud could be present. (See paragraph .13.) Discussion among engagement personnel regarding the risks of material misstatement due to fraud. This section......

Words: 25387 - Pages: 102

Premium Essay

Financial Statements

...Financial Statements Travis Atkins University Of Phoenix Principles of Accounting I ACC/290 Jim Hill February 25, 2014 Financial Statements In the corporate world there are many different things that must take place on a day to day occurrence for the company to maintain to operate at a successful level; one of the main things that must happen is the different type of financial reports that must be made. In any company there will be the at least four main reports a balance sheet, an income statement, a retained earning statement, and a statement of cash flow. These different reports are the back bone of any financial decision that a company must make and also help to track the flow of money within the company. The balance sheet is used to report the total amount of assets at any given time. The sheet breaks down and tracks two main things, the first being the claims of the different creditors which will most likely be displayed as the liabilities because they have not been paid out yet, and the second being the claims of the owner or the stock equity. By adding these two different items together you will get the companies assets which in turn will have to be balanced to the claims to assets in order for the company to keep an accurate account of the money flow. One of the other reports that must take place is something that you are use to seeing from your personal bank every month that is an income statement. This report will show how a company spent or gained......

Words: 773 - Pages: 4

Premium Essay

Financial Statements

...Katrina Baron Financial Statements The four basic financial statements are the balance sheet, income statement, statement of cash flow, and the statement of retained earnings. The balance sheet depicts the current financial circumstances of the company. This reports the company’s assets, liabilities, and net equity as of a given point in time. The income statement reports the company’s cost and revenues. This reports the company’s income, expenses, and profits over a period of time. The statement of cash flow describes the changes is cash and cash equivalents. This reports the company’s activities, such as its operating, investing, and financing costs. The statement of retained earnings reports the changes in equity. Basically this explains the company’s retained earnings over the reporting period. The internal users would be managers and employees that use the financial statements. They would use the financial statements to obtain the data to use for any future budget concerns. The internal users can use the data to set performance goals for the company. They can also use the data to see where the company needs to increase revenue from a certain department in the company. Along with being able to see where they need to make cutbacks. The internal users rely on the financial statement to direct the company in all its daily activities. The external users for the financial statement would be investors and creditors. The data obtained from the financial statement would be......

Words: 326 - Pages: 2

Premium Essay

Financial Statement

...[pic] |1.1 PRELUDE | Financial Structure is the framework of various types of financing employed by a Oil company to acquire and support resources necessary for its operations, commonly, it comprises of stockholders’ investments, long- term loans, short-term loans and short-term liabilities as reflected on the right hand side of the Oil company balance sheet. Financial Structure is different from capital structure in the sense that it also includes current liabilities. Therefore, financial structure is the combination of two main components 1) Capital structure and 2) Current liabilities. To provide an understanding of the concept of financial structure in Oil sector specifically capital structure of Padma Oil Company Limited, the balance sheet, debt and equity, working capital, cost of capital and opportunity cost are need to be explained. The capital structure is how an Oil company finances its overall operations and growth by using different sources of funds. It is a mix of a company’s long-term debt, specific short-term debt, common equity and preferred equity. Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered part of the capital structure...

Words: 10980 - Pages: 44

Premium Essay

Financial Statements

...Finnlines Plc FINANCIAL STATEMENTS 2013 CONTENTS BOARD OF DIRECTORS’ REPORT ................................................................................................................................ 4 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME, IFRS ...................................................................... 9 CONSOLIDATED STATEMENT OF FINANCIAL POSITION, IFRS ............................................................................. 10 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY, IFRS .............................................................................. 11 CONSOLIDATED STATEMENT OF CASH FLOWS, IFRS ........................................................................................... 13 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.................................................................................. 14 1. CORPORATE INFORMATION ........................................................................................................................ 14 2. ACCOUNTING PRINCIPLES ........................................................................................................................... 14 BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS ............................................................................. 14 IMPLEMENTATION OF STANDARDS ....................................................................................................................... 14 ADOPTION OF NEW AND AMENDED......

Words: 31417 - Pages: 126

Premium Essay

Limitations of Financial Statement

... The financial statements’ limitations include intentionally manipulating the figures; cross-company or cross-time comparison difficulties in times when different accounting methods are used to prepare the statements and where incomplete records of a firm’s economic prospects exist due to a sole focus on financial measures Financial statements are open to human interpretation and error, worse of all, intentional manipulation of figures. There are instances when high profile management officials have been involved in manipulating figures of the financial statements to indicate inflated economic performance. As such, there are calls focusing on the independence and objectivity of auditing firms. Public companies require an audit of the financial statements useful for investment, tax purposes and financing. Independent accountants and auditing firms usually carry out an audit and their report is included in the annual report. The managing official, for example, the CEO is responsible for attesting that the financial statements are not misleading or untrue. They should also make sure that the financial statements expose those officials involved in any malpractice to face the law. Different ways of accounting across companies and across periods pose another limitation of financial statements since it is difficult comparing a company’s finances across time or comparing finances across companies. In addition, different countries have adopted their own accounting principles thus......

Words: 265 - Pages: 2

Premium Essay

Financial Statement

...Financial Statement Differentiation Paper Financial Statement Differentiation Paper ACC/561 The Four Financial Statements consist of income statement, balance sheet, statement of cash flow, and statement of owner’s equity. The progress with the income statement, states gross revenues, minus the goods sold would give the gross profit of the company. Balance sheet consists of long term assets and long term liabilities that are current issues. The cash flow would be recognized by the money the company has coming in, to where the money goes out, and the statement of owner equity gives details of the account over a period of time. Income Statement have a different description that contains expenses of Revenue during a time period, minus cost of goods sold, which would then give the gross profit. Once the net income would be figured out, the net income would be transferred over to the balance sheet. Balance sheet would consist of any assets and liabilities that are current and long term. The balance sheet has to make sure both ends balance out the same. Statement of cash flow gives the direction of company of where money is taken in from and to give ideas where the money is going to. This would consist of cash and payments. The statement of Owner Equity gives details that have taken place over course of one year of the owners’ equity account. The financial statement that would be of interest to investors would consist of income statement, balance......

Words: 445 - Pages: 2

Premium Essay

Financial Statement

...Auditors’ report and consolidated financial statements for the year ended 31 December 2011 S. F. AHMED & CO Chartered Accountants House 25, Road 13A, Block D, Banani, Dhaka 1213, Bangladesh Telephones (880-2): PABX 989-4346 & 989-4258 Others 881-6467 & 881-5101 Fax (880-2): 882-5135 E-mails: (i) sfaco@citechco.net (ii) sfaco@sfahmedco.org Website: www.sfahmedco.org Auditors’ Report to the Shareholders of AB Bank Limited We have audited the accompanying consolidated financial statements of AB Bank Limited (“the Bank”) and its subsidiaries, namely, AB Investment Limited, AB Securities Limited, Cashlink Bangladesh Limited, AB International Finance Limited and AB Exchange (UK) Limited which comprise Consolidated Balance Sheet at 31 December 2011 and Consolidated Profit and Loss Statement, Consolidated Cash Flow Statement, Consolidated Statement of Changes in Equity and Liquidity Statement for the year then ended, and a summary of significant accounting policies and other explanatory information. Management is responsible for the preparation and fair presentation of these financial statements in accordance with Bangladesh Financial Reporting Standards, and for such internal control as management considers necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud and error. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted......

Words: 43601 - Pages: 175

Premium Essay

Financial Statements

...This paper is all about financial statements. An introduction to financial statements is presented to give a background to the reader. In the introductory part, the fundamental accounting concepts used in the preparation of financial statements are included together with the explanation of their basis. Examples are also given as an illustration of its application. This consist the first part. On the other hand, the second part is about the evaluation of the role of financial accounting in aiding the decision-making processes of the four different non-management stakeholder groups. An explanation of the nature of these decisions is also included. The paper ends with the issue on the conflicts arising from the diverse interest of the said entities to the financial statements. Introduction to Financial Statements One of the steps included in the accounting cycle is the preparation of the principal financial statements. They are the Income Statement and the Balance Sheet. These financial statements are a means by which the information accumulated and processed in financial accounting is periodically communicated to the users. Once the worksheet is completed, it is easy to prepare the financial statements as the necessary data have already been summarized. A third financial statement, which is the Statement of Cash Flows, provides information about cash receipts and cash payments into operating, investing, and financing activities. A......

Words: 2321 - Pages: 10

Premium Essay

Financial Statements

...Financial Statements Genesis Ruiz Acc/290 June 14, 2012 Mary Larsen Financial statements When people think of business they think of money. Business is not about just money there is a lot more to it. Money is business but what happen when you go deeper into financial statements. Financial statements are a collection of reports about an organization's financial results and condition. Financial statements are useful to determine the balance sheet, income statement sheet, statement of stockholders equity, and cash flow statement. Financial statement helps conclude if the business has the potential to pay back its debts, track financial results as well to derive financial ratios. Investigate the details of certain business transactions, and determine the ability of a business to generate cash, and the sources and uses of that cash. Financial statement in a business is not just one thing but there are four basic financial statements. It all begins with the balance statement. Balance sheet statement review business assets, liabilities and shareholders' equity at a precise instant in time. It gives investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders. Second statement is the incomes sheet of the actions a company's financial operation over a precise accounting time. On the other hand is the cash flow statement. Cash flow statements illustrate the total of increase or decrease in cash......

Words: 781 - Pages: 4