The financial statement limitations They have to do with reports that, since they are not conclusive, but are temporary, are not representative of the value that corresponds to the business. because the structural elements are not directly related to profitability or financial situation, therefore …
What are the limitations of the financial statements based on?
The financial statement limitations they are based in principle on financial information.
Also for the transactions carried out by the business.
- Due to the transformations that are being made internally in the business.
- There is no accuracy in the financial statements because there is no definition in figures since they are made by the principles of accounting and personal judgments.
- The financial statements show interim reports and show a profit, loss account, but there is no accuracy in what the balance sheet shows.
- It is prepared considering some concepts in addition to accounting agreements and it is for this reason that there is no demonstrable reality in the financial position.
- Deflation and inflation affect the financial statements because when expressed in monetary units, this incidence loses significance in the short term.
- They are not definitive but provisional because when there is a real profit or loss it is determined when a product is sold or liquidated.
- As long as the business exists it is necessary to keep a frequent accounting of at least every year as a standard period.
- The accounting period with its distribution of costs and income is consistent with a personal criterion and it is necessary to satisfactorily balance income and costs.
- In general, the board of directors of a public limited company is the one that has the responsibility of making these decisions, although they can also be acquired by the company’s accounting supervisors or officials.
- They give monetary figures that are exact, so they would appear definitive, since they can show the value of an asset represented by the effective amount of a settlement or an effective balance that could be less due to expenses with respect to the settlement.
- The fixed asset is closely related to the historical cost and is deducted according to the amount charged in favor of the profits of the profit and loss statement, which means accumulated depreciation.
- There is no reflection of the figures or the amount for which the fixed asset can be sold, nor the amount to spend for its replacement.
- They are not a reflection of the factors that affect the financial condition. These factors include the raw materials with their commitments, their sources and promises.
- The external analyst does not access the accounting records for which he needs, on the one hand, the published statements and financial information. Most are the basis for the granting of credit and have not been audited and even most are prepared lightly.
- However, they are important because the public accountants compared them with the accounting records and have studied them, since the accountant investigates according to the procedures and standards accepted by the audit and gives an opinion on the financial statements in order to present the financial situation.
Ways of presenting financial statements
Financial statements are prepared for various groups of people and they are interested in different types of information.
Then it is possible to present a single financial statement for all groups with auxiliary or special statements.
However, the financial statements are modified and adjusted according to the interested entity or person, therefore the most common are:
They prepare for credit and commercial transactions by emphasizing the company’s liquidity, profitability and long-term ability to pay.
They are prepared to present the financial statements to the tax administration with a single tax character and with the possibility of adjusting them.
Balance Sheet Limitations
The balance sheet presents the net worth, contingent liabilities, main activities and there are limitations.
What intellectual property involves, such as research products, ideas, new products under development, and non-patenting processes are not quantified.
The balance sheet can quantify the equity of the company with its main activities including equipment, investments, real estate and net cash, which is important, but it cannot budget for some factors that are also of importance such as the qualification of the personnel. of the business or the intellectual property not evaluated.
The financial statements do not quantify components that are important within the company such as the strength or weakness of employees.
Liabilities, expenses, loans are contingent liabilities that were not established.
The budgets include only the components that are suitable to be quantified.
Limitations on the use of financial information
The financial statements are analyzed according to the calculation of ratios that are classified into categories according to the relevant information,
The financial statements are analyzed in comparison with current liabilities,
An automatic comparison of total sales is made as a gross measure of profit with the inventory, after which it indicates the utilization rate of the same.
The ratios are calculated directly as well as from a criterion based on the analyst’s experience, since an experienced analyst can apply a correct criterion after having studied and carried out an analysis in different industries in different times of prosperity and recession.
The financial reasons are:
Liquidity, that is, how a company can meet short-term obligations.
The productivity of the company relating the capital invested with the sales.
The capital structure, that is, the company’s resources in terms of sources.
The use of working capital, that is to say, the efficiency in the use of the components of the current assets without neglecting the liabilities of the same nature.
The financial statements and especially the balance sheet show the book value based on the resources with the obligations of the company that are countable and quantifiable.
They do not show all the coherent value of the company in its entirety, therefore the financial statements do not represent all the essentials of the company such as the market, the brand, the product, the intellectual value or the human resources.
They are based on estimates that are prepared for certain limited accounting periods and therefore are not exact.