Learning Materials For Accounting, Management , Finance And Economics.

Saturday, October 31, 2009

Limitations Of Financial Statements

Financial statements are useful sources of accounting information. Although they provide accounting information to the users (management, employee, investors etc.), these statements also suffer from some limitations. The major limitations of financial statements can be pointed out as follows:

1. Lack Of Quantitative Information 

Financial statements include the quantitative information which is expressed in monetary units. They do not provide any qualitative information which may have greater impact upon the decision makers. So, lack of quantitative information is one of the main drawbacks of financial statements.

2. Based On Past Data

Financial statements record and reveal only the historical data in nature. They do not include any future possible results. So, they may not provide correct information to formulate future plans and policies.

3. Based On Principles

Financial statements are strictly confined within the boundary of some accounting principles. They are used as the guidelines in recording and reporting the financial transactions. 

4. Summary Only

Financial statements are just the summary reports of the company's financial transactions. All the detailed information regarding to such transactions cannot be disclosed in the financial statements. 

5. Cost Basis

Another limitation of financial Statements is that they show the information on cost basis i.e. the price paid on the transaction's date. The effect of price level changes (inflation) is not shown in the financial statements. In other words, the information are not given in the current value.