MBA (Finance) – IV Semester, Investment and Portfolio Management, Unit 2.3
Define Limitations of Financial Statements
The financial statements contain historical information. This information is useful; but an investor should be concerned more about the present and future.
Limitations of Financial Statements
The financial statements contain historical information. This
information is useful; but an investor should be concerned more about the
present and future.
Financial statements are prepared on the basis of certain accounting
concepts and conventions. An investor should know them.
The statements contain only information that can be measured in
monetary units. For example, the loss incurred by a firm due to flood or fire
is included because it can be expressed in monetary terms. The loss incurred by
the company due to the loss of reputation is not given in the statement because
it cannot be measured in monetary unit.
Sometimes management may resort to manipulation of data and window
dressing. This can be carried out by
Method of charging depreciation
Valuation of inventory
Revaluation of fixed asset
Changing the accounting year
An investor should scrutinize the financial statements to find out the manipulations, if any. Thtors’epornotes thalance sheet givitalue the investor in this regard. Analysis of financial statements should be undertaken only after nullifying the effects of any such manipulation.
