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Question

Explain the limitations of financial statements.


Solution

Limitation are:

1. Financial statements reflect historical data i.e. it reflects the original price of the items or the price at which items were acquired. It fails to highlight the current price of items as per market and also inflated price due to rising inflation in the market. Hence data and information are historical in nature.

2. Financial statement do not portray the qualitative aspects of any transaction, the aspects such as size, colour, quality and the capabilities. Only quantitative data which can be expressed in monetary value are considered.

3. Financial statement are biased in nature as it is dependent on the personal judgement regarding the way transactions are recorded

4. It becomes difficult to assess the financial performance of one company with another due to differences in practices and methods adopted by each company.

5. It will be difficult to forecast as the statement is prepared based on historical data as it fails to capture inflation rates.

6. The company can manipulate the data to show better liquidity position which can give false impression to the investors leading to project cancellation

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