I understand that financial statements are essential for evaluating a company’s performance, but I’ve also read that they have certain limitations. Can someone explain what these limitations are? For example, do they fail to show market value, non-financial factors, or future risks? Would love a clear explanation or examples.
What are limitation for Financial Statements?
- Thread starter smith
- Start date
Rick_Grimes
Member
Financial statements have limits because they show past data, ignore non-financial factors, depend on accounting methods, and don’t always reflect true market value.
Here are the main limitations of financial statements:
- Historical data – They show past performance, not future trends.
- Non-monetary factors ignored – Qualitative factors like employee skill or brand value aren’t shown.
- Estimates and judgments – Many figures rely on assumptions (e.g., depreciation, bad debts).
- Inflation effects – Values may not reflect current market prices.
- Window dressing – Companies can manipulate data to appear better.
- Not comparable – Different accounting policies make comparisons hard.