Limitation Of Financial Statement Essay

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3.1 THEORETICAL BACKGROUND OF THE STUDY While analyzing financial statements, first knowing what a financial statement is. Financial statements are summarized periodical reports of financial and operative data contained in the books of accounts, known as General Ledger. It is the source of information available to the public, shareholders, investors, creditors and the government. These statements are used not only for finding out the end result of the activities of the firm but also for decision making. Financial statements may be defined as statements containing summaries of complete information about financial position and working performance of an enterprise. They refer to a package of statements such as balance sheets, …show more content…

For example, the principle of cost price or market price whichever is fewer is followed for valuation of stocks. Personal judgments: Personal judgment will have an impact on the financial statements. For example, the method of stock valuation, method of depreciation etc. depends on the personal judgment of the accountant. 3.3 LIMITATIONS OF FINANCIAL STATEMENTS • Financial statements do not present a final picture of the business. They suffer from the following limitations: • Financial statements are only interim reports. They are not concluding because the exact financial position is known only when the business is sold or liquidated. • Some items in the financial statements are based on personal judgments of the accountant. This will affect the validity of financial statements. • Balance sheet does not reveal the true picture of the business. In the balance sheet, assets are shown at exact costs. Realizable value is ignored. • Financial statements ignore the deviations in price level. These statements are accounting for past rather than accounting for future. Hence they are of little value to management in taking …show more content…

Financial analysis is the process of identifying the strength and weakness of the company with the help of company accounting information provided by the Profit and Loss Account and Balance sheet. It is the process of valuation of relationship between components of financial statements to obtain a better understanding of the firm’s financial performance. It is a technique of analyzing the financial position as well as the progress of the firm. Financial analysis will give the management considerable insight into the levels and areas of strength and

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