Advantages And Disadvantages Of Financial Statements

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A financial statement is a formal record of the financial activities of a business, person or other entity. Companies generally prepare four types of financial statements: 1) the balance sheet: which represents an illustration of what a company owns and owes over a period of time, that is the company’s assets and liabilities; 2) the income statement: which illustrates the company’s profits and losses and their income and expenses over a period of time. This is useful in gauging the success of business performance; 3) the statement of retained earnings: which shows how much income was retained within the organization to allot for future growth; and 4) the statement of cash flows: which reports on the cash flow activities and indicates where…show more content…
While this is so, the statements do not necessarily reflect the current value of since these can be affected by the choice of accounting principles and policies. The value of assets is illustrated in the balance sheet. The principles and policies used in the preparation of a balance sheet causes its ability to reflect the current value of assets to be limited. A balance sheet provides a summary of the financial balances of a company. It lists the assets, liabilities and owners equity, at a specific date. A balance sheet therefore provides a "snapshot of a company's financial condition". A balance sheet has three main limitations, which are as follows: 1) the fact that assets are recorded at historical cost; 2) the use of estimates; and 3) the fact that it cannot reflect those assets which cannot be expressed in monetary…show more content…
The balance sheet does not illustrate the value of assets which cannot be expressed in monetary terms, such as the intelligence and expertise of directors, or the honesty and loyalty of employees. Furthermore only the assets acquired in transactions are included in balance sheets. Assets which are internally generated are not recorded and reported in the balance sheet, which further limits its accuracy in projecting a company’s ability to generate cash. In addition to the aforementioned limitations of balance sheets, there are general limitations which may also affect the value of assets illustrated. These limitations include inaccuracies which may arise due to the intentional manipulation of figures, by those in corporate governance positions. Material misrepresentations may go undetected due to the inability to verify statements and information due to inherent limitations of the audit process. Due to these limitations a company’s financial statements may not always illustrate its strengths, due to the choice of accounting principles and policies. It is therefore true that financial statements do not necessarily reflect the current value of

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