/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Question 7Q What is the likely limitation of... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 1: Question 7Q (page 22)

What is the likely limitation of 鈥済eneral-purpose financial statements鈥�?

Short Answer

Expert verified

Limitations of general-purpose financial statementsinclude the periodic nature of statements, statements not being realistic, lacking objectivity due to personal judgment, reporting only financial matters, and no suggestive approach.

Step by step solution

01

Meanings of Financial Statements

Financial statementsare the statements prepared to provide information regarding the financial position, its operating results and keep track of the cash flows of the business.

02

Limitations of Financial Statements

Financial analysts, advisors, and other interested persons suffer from certain limitations even though financial statements are the back-bones of the decision-making process for different levels of executives of the organization. The reported facts and figures may not be precise, exact, and final. Also, some aspects which may be crucial for decision-making purposes may go unreported.

The following are some of the limitations of financial statements:

  • Periodic nature of statement: The profit or loss arrived at in the profit and loss account is for a certain period. It does not give any idea about the earning capacity over time. Similarly, the financial position as of the balance sheet date is true of that point in time. The likely change in position on a future date is not depicted. The balance sheet estimates and shows the liabilities dependent on future events that are contingent liabilities. They are not accurate figures. Likewise, revenue expenditure is sometimes partly charged to profit and loss accounts and partly deferred or carried forward. The annual statements do not reveal the exact earning capacity in all these respects.
  • The statements are not realistic: Financial statements are prepared based on certain accounting concepts and conventions. As a result, the financial position depicted in the statements cannot be considered realistic. Also, the profit and loss account invariably includes probable losses but does not include probable income. This is according to the accounting convention of conservation.
  • Lack of objectivity due to personal judgment: Values assigned to many items are determined based on the personal judgment of accountants. Hence, relevant amounts shown in the financial statements have no objectivity and are not verifiable. For instance, estimates of the life of fixed assets and the depreciation method are based on the personal judgments of the accountants. The method of valuation to be adopted depends on the policy at the discretion of the management based on their judgment.
  • Only financial matters are reported: The financial statements present information in terms of monetary units. Facts that cannot be depicted in money terms are excluded from the statements. Thus, information relating to the development of skill and efficiency of employees the firm鈥檚 public image is not found in the financial statements. Yet these are quite relevant for investors to consider while forming opinions about the firm鈥檚 future prospects.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

(Objective of Financial Reporting) Karen Sepan, a recent graduate of the local state university, is presently employed by a large manufacturing company. She has been asked by Jose Martinez, controller, to prepare the company鈥檚 response to a current Preliminary Views published by the Financial Accounting Standards Board (FASB). Sepan knows that the FASB has a conceptual framework, and she believes that these concept statements could be used to support the company鈥檚 response to the Preliminary Views. She has prepared a rough draft of the response citing the objective of financial reporting.Instructions

  1. Identify the objective of financial reporting.
  2. Describe the level of sophistication expected of the users of financial information by the objective of financial reporting.

GAAP stands for:

  1. governmental auditing and accounting practices.
  2. generally accepted attest principles.
  3. government audit and attest policies.
  4. generally accepted accounting principles

The objective of financial reporting places most emphasis on:

  1. Reporting to capital providers.
  2. Reporting on stewardship
  3. Providing specific guidance related to specific needs.
  4. Providing information to individuals who are experts in the field.

What are the primary advantages of having a codification of generally accepted accounting principles?

GROUPWORK (GAAP Terminology) Wayne Rogers, an administrator at a major university, recently said, 鈥淚鈥檝e got some CDs in my IRA, which I set up to beat the IRS.鈥� As elsewhere, in the world of accounting and finance, it often helps to be fluent in abbreviations and acronyms.

Instructions

Presented below is a list of common accounting acronyms. Identify the term for which each acronym stands, and provide a brief definition of each term.

(a) AICPA (e) FAF (l) FASB

(b) CAP (f) FASAC (j) SEC

(c) EITF (g) GAAP (k) IASB

(d) APB (h) CPA
See all solutions

Recommended explanations on Business Studies Textbooks

Operational Management

Read Explanation

Organizational Behavior

Read Explanation

Public Relations Business Studies

Read Explanation

Sales in Business

Read Explanation

Nature of Business

Read Explanation

International Business

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.