Answer
Financial statements are prepared to present a report on:
- Status of the investments in the business and
- Results achieved during the review period.
The above objectives suffer from the following limitations:-
- Financial Statements are Only Interim Reports: According to this, it can be said that financial statements can not be final because exact amount of profit or loss of a business can be determined after closing down the business. So profit depicted by Profit and Loss account and financial position shown by Balance Sheet is not exact. So, it is necessary to prepare financial statement at relatively short accounting period.
But this cutting off the balance sheet dates gives the problem of allocation of cost and income. Financial statement data can not afford to remain exact under such conditions.
- Depend Upon Accounting Concepts and Conventions: Financial statements are prepard on the basis of certain accounting concepts and conventions. Financial position presented by these statements may not be real. For example, the value of an asset represents the amount of asset which is valued on the basis on “going concern concept”. This means value of fixed assets may not be same which can be realise after the sale of asset.
- Based on Historical Cost: The financial statements are based upon historical cost. They do not give present value of business and any information regarding the future.
- Disclose Only Monetary Items: Financial statements do not give true picture of the business because they do not show those items which can not be expressed in monetary terms. For example, goodwill of the firm, health of workers, efficiency of management etc.
- Affected by Personal Judgement and Knowledge: Many items of financial statements are affected by personal judgement and knowledge of accountant. Some of items e.g. stock valuation methods, method of depreciation, capital and revenue expenditure are decided by personal decision.
