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Chapter: 12th Accountancy : Financial Statement Analysis

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Limitations of financial statements

Following are the limitations of financial statements:

Limitations of financial statements

Following are the limitations of financial statements:

Lack of qualitative information: Qualitative information that is non-monetary information is also important for business decisions. For example, efficiency of the employees, efficiency of the management, etc. But, this is ignored in financial statements.

Record of historical data: Financial statements are prepared based on historical data. They may not reflect the current position.

Ignore price level changes: Adjustments for price level changes are not made in the financial statements. Hence, financial statements may not reveal the current position.

Lack of consistency: Different business concerns may use different accounting methods. Hence, comparison between two business concerns becomes difficult.

Give only interim reports: Financial statements are prepared at the end of every accounting period. But, the actual position of the business can be known only when the business is closed. Hence, financial statements may not reveal the exact position of the business concern.

Limited access to external users: The external users do not have detailed and frequent information of financial results as they have limited access.

Influenced by personal judgement: Preparation of financial statements may be influenced by personal judgements and therefore these are not free from bias.



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