Importance and Limitations of Financial Statements

Importance of Financial Statements

Financial statements are the important sources of information to all the users of accounting information like; management, owners, debtors, creditors, employees, government agencies, financial analysts, etc. The following are the points which highlight the importance of financial statements:

  1. Financial statements are the summary of information relating to profitability, and resources owned by the firm.
  2. Financial statements provide the information which can be compared with those of other firms.
  3. Employees can use financial statements to demand for increment in salary and other benefits.
  4. Bankers and other financial institutions can use financial statements to make the lending decisions.
  5. Government bases on financial statements of the companies for the calculation of tax revenue from the firms.
  6. Financial statements can be used as the basis for management decision-making purpose like planning, promotion, research and development decisions etc.
  7. Existing investors can use financial statements to assess how efficiently the firm is using their funds.
  8. Potential investors can obtain information with the help of financial statements which can be useful to take investment decisions.
  9. Financial statements reveal the history of the firm.
  10. Financial statements can be used to assess the firm’s  liquidity and solvency position.

Limitations of Financial Statements

The financial statements suffer from the following limitations:

  1. Financial statements include the quantitative information which is expressed in monetary units. They do not provide any qualitative information which may have greater impact upon the decision makers.
  2. Financial statements record and reveal only the historical data in nature. They do not include any future possible results.
  3. Financial statements are strictly confined within the boundary of some accounting principles. They are used as the guidelines in recording and reporting the financial transactions.
  4. Financial statements are just the summary reports of the company’s financial transactions. All the detailed information regarding to such transactions cannot be disclosed in the financial statements.
  5. Financial statements show the information on cost basis i.e. the price paid on the transaction’s date. The effect of price level changes (inflation) is not shown in the financial statements. In other words, the information are not given in the current value.

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