Question

What are the limitations of financial statements?

Options

• Do not reflect current situation 

• Assets may not realize 

• Bias

• All of the above

Answer 1

All of the above.

Explanation:

Do not reflect current situation: Financial statements are created using historical cost data. The values of assets and liabilities represented in financial statements do not reflect actual market conditions since the purchasing power of money fluctuates.

Assets may not realize: Accounting is done according to rules. If the corporation is forced to liquidate, some of the assets may not realise their declared valuations. The assets listed on the balance sheet are simply unexpired or unamortized costs.

Bias: Financial statements are the result of documented facts, accounting ideas and conventions used, and personal judgments made by accountants in various scenarios. As a result, bias in the findings may be seen, and the financial position depicted in financial statements may not be realistic.