Uses, Importance, and Limitations of Financial Statements

The financial statements show only the monetary/quantitative information and ignores the impact of a qualitative information on the financial statements. Qualitative information like efficiency of the management, employer employee relationship, customer satisfaction, loyalty of customers etc. are ignored by the financial statements. However, these are equally important to understand the financial position of an organisation.

The financial statements show only the monetary/quantitative information and ignores the impact of a qualitative information on the financial statements. Qualitative information like efficiency of the management, employer employee relationship, customer satisfaction, loyalty of customers etc. are ignored by the financial statements. However, these are equally important to understand the financial position of an organisation.

Credit gaining institutions take decisions based on the financial performance of the undertakings. They refer the financial statements to analyse the performance of the business. Credit gaining institutions need to check whether the company is capable of repaying the credit they are taking or not. 

Profit and loss account discloses the profit/loss for a specified period. The period can be for a year or for a quarter. The Statement of Profit and loss shows the revenues and expenses of the business earned or incurred during the accounting year. The statement helps in understanding the financial position of the business.

Financial statements of a company show the aggregate information. By aggregate we mean that all the transactions that have taken place in the business during the whole year. The financial statements do not show detailed information regarding about every transaction only recording of transaction takes place, not all details of the same are disclosed in the statements.

Financial statements of the company record the assets at historical cost and not at market price. They fail to record the profit/loss that arise from the fluctuations in the market price of the assets. Hence, we can say that the financial statements do not show the complete picture of the business.  

Shareholders of companies are interested in knowing the status, safety and return on their investment. 

They may also need information to take decision about continuation or discontinuation of their investment in the business. Financial statements provide information to the shareholders in taking such important decisions.

Pooling of interest method is applicable for amalgamation in nature of merger, because Amalgamation in nature of merger is the former method where the two balance sheets are consolidated and a new balance sheet is made. Thereby said as in nature of merger. This method considers historical costs and doesn't take into account intangible assets like Goodwill.

Financial statements provide necessary information about the performance of management. The financial statements show the financial position of an organisation, thereby telling if the policies, procedures and methods used by the management were useful or not. 

The financial statements show the financial position of an organisation, thereby telling if the policies, procedures and methods used by the management were useful or not. They show the gap between the actual performance by the management and the owner's expectation.  

The financial statements of a company show the financial position of an organisation and helps in comparison with the past results. The financial statements helps the credit lending institutions to understand the liquidity, solvency of the company and thereby helping them with the decision to whether grant credit or not. The steward is a person who manages the resources and financial statements helps to understand if resource utilisation was useful or not. The investors of the company want to know whether the company will be profitable or not. 

Financial statements have a lot of limitations one being that the financial statements show the assets at the historical cost and not the current market price. They do not record the fluctuations in the price, there by the profit or loss from the same is not taken into account. 

Financial statements are very important for a business but it has many limitations being personal bias, assets may not realise, vital or qualitative information missing. The financial statements may be affected by personal bias as the person making the statements is a human being. Financial statements do not show detailed information about every transaction and they also do not record the qualitative information. The statements only record quantitative information.

Investors are the owners of the company. Financial statements help them to assess the long term solvency of the business in which they have invested. They asses whether they will get fair returns or not for the money they have invested in the business.  

The financial statements help the investors to calculate market price of the shares. Market price of shares is determined by the net income of the company for equity share holder. This income is basically after deducting all interest, tax, dividend of preference shareholders etc,. divided by the number of equity shares. 

Two primary qualitative characteristics are: - 1. relevance and reliability. 
Secondary qualitative characteristics are:- 1. Understandability 2. Verifiability 3. Timeliness 4. Comparability. 
Relevance refers to how useful the information is for financial decision making processes. 
Reliability refers to the extent to which information accurately reflects company's resources. 
Relevance and reliability are primary characteristics because if information is not helpful for decision making or not providing accurate information then understandability , timeliness of information is of no use.  

Financial Statements are the collective name given to Income Statement and Positional Statement of an enterprise which show the financial position of business concern in an organised manner.

Some of limitations of financial statements are as follows

Accounting information is sometimes based on estimates which may be unrealistic.

Window dressing may lead to faulty results. Window dressing means manipulation of accounts and Show easy picture of financial statements

Accounting ignores the effect of price level changes. Transactions recorded on historical cost. Examples, fixed assets recorded at historical cost.

Accounting information can be manipulated and thus cannot be considered as the true test of performance.

Accounting information may be Biased accounting information is not without personal influences or bias of accountant.

The accounting information generated by the accounting process is
communicated in the form of reports, statements, graphs and charts to the users
who need it in different decision situations. There are two main user group
viz. internal users, mainly management, who needs timely information on cost of
sales, profitability, etc. for plaining, controlling and decision making and external
users who have limited authority, ability and resources to obtain the necessary
information and have to rely on financial statements (Balance sheet, profit and
loss account)

As per “Generally
Accepted Accounting Principles (GAAP)” one of the important rule is to
record all transactions on the basis of historical cost, which is verifiable
from the documents such as cash receipt for the money paid. This brings in
objectivity in the process of recording and makes the accounting statements
more acceptable to various users.

Financial statements are the outcome of recorded facts, accounting concepts and conventions used and personal judgements made in different situations by the accountants. Hence, bias may be observed in the results, and the financial position depicted in financial statements may not be realistic.

A financial statement is a collection of data organised according to logical and consistent accounting procedures. Its purpose is to convey an understanding of some financial aspects of a business firm.

Financial statements show aggregate information but not detailed information. Hence, they may not help the users in decision-making much. 

As Financial statements are prepared on the basis of historical cost.

It creates a demerit of financial statements. Since
the purchasing power of money is changing, the values of assets and liabilities
shown in financial statement do not reflect current market situation.

Financial statements aim to provide a true and fair view of a company's financial position. Bias is a negative trait that undermines the reliability and utility of these statements.

Financial statements help
the stock exchanges to understand the extent of transparency in reporting on
financial performance and enables them to call for required information to
protect the interest of investors. 

A financial statement is a collection of data organized according to logical and consistent accounting procedures. Its purpose is to convey an understanding of some financial aspects of a business firm.

One of the importance of financial statement is it aids trade
associations in helping their members as Trade associations may analyse the
financial statements for the purpose of providing service and protection to
their members. They may develop standard ratios and design uniform system of
accounts.

A financial statement is a collection of data organised according to logical and consistent accounting procedures. Its purpose is to convey an understanding of some financial aspects of a business firm.

One of the importance of financial statement is it aids trade
associations in helping their members as Trade associations may analyse the
financial statements for the purpose of providing service and protection to
their members. They may develop standard ratios and design uniform system of
accounts.

Financial statements are written records of a business's financial situation. They include standard reports like the balance sheet, income or profit and loss statements, and cash flow statement.

Though utmost care is taken in the preparation of the financial statements and provide detailed information to the users. Shareholders of companies are interested in knowing the status, safety and return on their investment. They may also need information to take decision about continuation or discontinuation of their investment in the business.

But financial statements contain only monetary
information but not qualitative information like industrial relations,
industrial climate, labour relations, quality of work, etc.

The users of financial statements include management, investors, shareholders, creditors, government, bankers, employees and public at large.

Shareholders of companies are interested in knowing the status, safety
and return on their investment. They may also need information to take decision
about continuation or discontinuation of their investment in the business.
Financial statements provide information to the shareholders in taking such
important decisions.

The investors include both short-term and long-term investors. Their prime considerations in their investment decisions are security and liquidity of their investment with reasonable profitability. Financial statements help the investors to assess long-term and short-term solvency as well as the profitability of the concern.

Value of Equipment as on 1st Jan $2012=  Rs. 25,000$
Less: Depreciation for the year  $2012   = 7,500$
Total                                                     $ = 17,500$
Less: Depreciation for the year 2013(17,500 x 30%) $= 5,250$
Net Book value of the Equipment $ = Rs. 12,250$