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Limitations of Financial
Statements
Objective: explain the
significance and limitations
of statements
Indicator of
Performance
Accounting affect behaviour and
management and have effects
across departments, organisations
and even countries. Information
contained within a financial
statement has the power to
influence actions where profits and
the bottom line are daily concerns.
Financial Statements
Affect Decision Making
Financial statements affects
decision as it:
Provides managers with information
for decision making and planning
Assist managers in directing and
controlling operations
Motivate managers towards
organisations goals measure the
performance of managers and subunits within the organisation.
Limitation - Accounting
information is historical
The historical cost convention is
often applied when preparing
financial statements.
Although historical costs convention
offers objectivity as assets and
expenses are recorded at actual
costs as ascertained from source
documents, it fails to allow changing
value of money.
The application of the historic cost
convention also means that assets
and services having no cost cannot
be recorded in the ledger accounts.
Limitation - It is subjective
Limitations - Difficult to
account for intangible costs
Intangible costs are difficult to
ascertain.
It is difficult to estimate the
costs associated with the firms
image, good relations with
investors, employees and
customers.