Critically Assess the Uses and Limitations of Financial Statements Essay

Critically assess the personas and limitations of monetary accounts The definition for a fiscal literary argument is a written report which quantitatively describes the monetary health of a company. (www. investorwords. com) It consists of a equilibrate cruise, income literary arguments and a cash feed in statement. This essay will critically asses the uses and limitations of separately of these types of monetary statements for a billet. A equilibrise canvass shows the pecuniary condition of a course line at a special date (Langemeier & Klinefelter 2008). It shows what is owned by the worry, what is owed and the proprietors shargon (net worth) of the business.The parallelism sheet has three master(prenominal) uses. Firstly, it is utilize for reporting purposes as part of a hold in companys annual accounts. These must(prenominal) be shown to Companies House, HM Revenue and springer and any shargonholders unless agreed otherwise. It is also used to let potent ial investors or lenders asses the worth of a business at any given snip. This way they muckle judge whether they think they should be commit money into the business according to how resolving power the business is, how liquid its assets be, how the business is financed and how a good deal capital is cosmosness used.Finally they go off be used by the business itself to analyse how to improve its management. at that place ar a few limitations of a proportion sheet as around set of current assets are estimated (www. businesslink. gov. uk) therefore the balance wheel sheet does non reflect a 100% dead on target financial panorama of a business. Also, the fixed assets in the balance sheet have taken the derogation of the asset into consideration and so the adjust value is not shown.Finally, intangible asset assets much(prenominal) as goodwill cannot be careful and are therefore estimated figures too and may be very inaccurate so causing the whole balance sheet t o be incorrect. Therefore a balance sheet is useful in numerous shipway as long as whoever is interpreting the figures takes into consideration that a few of the figures are not accurate. An income statement, also cognize as a profit and exhalation account, measures the profits or losses a business has made over a certain period of time (money-zine. com).If a business wishes to expand and directs a bank building loan they will need to produce their profit and loss accounts for the forward three years so the bank can visualise whether they will be able to repay the loan. These must be accurate records or it will be taken into account as fraud. There are many advantages of keeping accurate and up to date records. Firstly, it gives a business the information it needs to be managed and servicing it grow. If a business can make up ones mind where its strong or weak points are then it can find ways to improve for example by clip down on expenses.It also enables a business to pr oduce their income statement quick if required and filling in their impose re playing period easier and quicker which in turn reduces the risk of interest for late tax payments. These financial statements are usually useable to the public which means competitors can see how each other are doing, thus far very few people derive them when all proceeding are preserve in larger companies. There are also some limitations of income statements one being that its data does not tell the drug user anything about what may happen in the succeeding(a) or factors that may affect future growth of the company.It is simply extra to write up data. The second limitation is that not all businesses use an acceptable accounting method. An example from www. money-zine. com states that if a business decides to revive depreciation then they hurt short-term net income and earnings (depreciation expense is larger). If they use straight line depreciation, net income in earlier years will be higher but it will be lower in the future (all things being equal). The final type of financial statement is a cash merge statement.It records the in spring and out hunt down of cash over a period of time. The cash flow statement allows investors to understand how a companys operations are running, where its money is glide path from, and how it is being spent. According Hertenstein Article 26 there are three main people that involve to see a businesss cash flow statements. Firstly stockholders want to know if the business is generating enough cash to pay dividends. secondly suppliers want to know if their customers will be able to pay if offered credit.Thirdly investors want to evaluate future growth potential. These types of financial accounts are cheap to maintain because you do not have to be a trained accountant to produce them as they are not a change as the other types of financial accounts. though the cash flow statement is a very useful tool of financial analysis, it has its own limitations which must be unplowed in mind at the time of its use.The main limitation is that the cash flow statement scarcely records cash transactions and so ignores the basic accounting sentiment of accruals and tems bought on credit and therefore are not suitable for judging the profitableness of a business. Also cash flow statements are prepared using diachronic information which is in the past. Therefore it does not asses what may happen in the future to a businesss accounts. In conclusion, there are many uses for financial statements as they provide a secure picture of a businesss performance when compared to each other, and the users can substantially spot flaws in the entitys financial position and manage these accordingly.However their limitations must be considered when analysing the data as they only supply the reader with past and give up quantitative data and do not address any of the qualitative frugal variables such as the morale of the employees or the quality of the management team. There is presently no way of measuring these intangible assets, even though a businesss human resources are some of its most valuable assets.