Page 333 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes 13.5 Limitations of Financial Statements

Following of main limitations of financial statement analysis:
1. It is just study of interim reports.

2. It check just monetary aspect of company’s performance and position but it ignores non-
monetary aspect of company.
3. It does not analyze the changes in price level of different items of financial statements.

4. Many accounting concepts and conventions are used for preparing financial statement and
these concepts and conventions are accepted for analysis. So, analysis is totally affected
with these accounting concepts.

5. Analysis of financial statements are just source but not decision or result because person
who write its interpretation, may also affect the analysis. So, different interpretation by
different person may become its limitation.
6. LIFO vs FIFO and different depreciation methods usage may bring difference in result and
performance of financial statement, so it is also limitation of financial statement analysis.
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7. If one company’s accounting period completes at 31 Dec. and other company’s accounting
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period completes at 31 march, we will unable to compare both company’s financial
statement and it will be the limitation of financial statement analysis.

Task Discuss the various contents of the Balance Sheet.
Self Assessment

True or False:
11. As per Section 209 of the Companies Act, it is compulsory for every limited company to
prepare the final accounts.

12. The rate of dividend which is recommended by the board of directors can be increased by
the shareholders if they think it is too low.
13. Provision is made for any known liability of which the amount can not be determined
with accuracy in advance.
14. When the rate of proposed dividend is more than 20%, 10% of profit must be transferred
to revenue reserves.
15. No dividend will be payable on calls in advance.

13.6 Summary

 Balance Sheet as we have seen is one of the most important financial statements.

 It is a periodic summary of the position of the business.
 It is the statement of assets, liabilities and owners’ capital as of a particular point in time.
 This statement in itself does not reveal anything about the details of operations of the
business.

 However, a comparison of two balance sheets could reveal the changes in business position.

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