Limitations of Financial Statements

Limitations of Financial Statements: Financial statements are prepared with extreme caution but still there are certain limitations which are bound to creep in these statements.

Some of the limitations of financial statements are mentioned below –

• Historical Costs: Current price changes are not taken into account as the financial statements are prepared on the basis of historical costs. The assets and liabilities are presented at their original cost and do not reflect the fluctuations caused by the current market conditions.
• Influenced by judgements: An accountant follows various accounting conventions, policies and assumptions while preparing the financial statements. They are also influenced by the personal judgements and bias of the accountant. This may lead to incorrect information supplied by financial statements.
• Subject to fraud: The supervisory or the managerial group of a company may purposely tamper the financial results presented. This situation can emerge when there is undue strain to report amazing outcomes. Due to this tampering, the financial statements would not disclose accurate details.
• Not always comparable with other companies: If a user needs to look at the results of various organizations/companies, their financial reports are not generally practically identical, in light of the fact that the companies use distinctive accounting practices. These issues can be located by analyzing the disclosures that go with the financial statements.
• Lack of precision: The precision of financial statements is not possible as the statements deal with matters which can’t be accurately expressed. The information is recorded by conventional procedures followed over the years. Different conventions, postulates, individual judgments and so on are utilized for building up the information.
• Lack of discussion of non-financial issues: The financial reports don’t address non-budgetary issues, for example, the environmental attentiveness of an organization’s operations, or how well it works with the local community. A business reporting great financial outcomes may be a disappointment in these different areas.
• No qualitative information: Financial Statements only focus on recording monetary information and completely ignore the non-monetary or the qualitative aspects of business like work culture, labour and industrial relations. This is one of the major limitations of financial statements.
• Omission of vital information: The financial figures relating to assets, liabilities, incomes and expenses are not the only categories which are of vital importance to the company. Information related to agreements entered into, cessation of agreements etc are also equally important to conduct fruitful analysis. However, these are missing in the financial statements.

Although, great care is exercised while preparing the financial statements, but there are certain limitations of financial statements which cannot be controlled. These limitations render the financial statements inaccurate and one cannot rely completely on the financial statements.

Chapter  3 –  Financial Statements of a Company

1. Meaning and Nature of Financial Statements
2. Objectives of Financial Statements
3. Types of Financial Statements
4. Uses and Importance of Financial Statements
5. Limitations of Financial Statements