uses and limitations of financial statements Flashcards
business owners
to help deciding whether their businesses should continue to operate or whether they need to put more money into their businesses.
managers
summarising the operational results of the business, financial statements can definitely help managers in formulating and implementing plans, as well as evaluating operational performance
lenders
need to know whether a firm will be able to pay interest and repay debt before lending it money
potential investors
project the firm’s future earnings before deciding whether it is worth investing in.
suppliers and customers
help to understand more about the financial performance and debt position of their trading partners
government bodies
to calculate the profits tax
L: reporting past results
may not meet the urgent needs of users
L: assets valued at historical cost
not provided based on current value and may not reflect their true worth
L: alternative accounting policies and methods can be used
it could be very misleading to compare the financial results of different firms w/o understanding the accounting policies and methods that they use
L: involvement of personal judgements
may lead to errors, manipulation and fraud
L: lack of qualitative information
may be crucial to the financial success of a business and information about them may have a great impact on decision-making
L: providing a summary w/o details
users may not be aware of the hidden issues or problems behind the reported figures
