Critically Assess the Uses and Limitations of Financial Statements Essay

Critically assess the uses and demarcations of pecuniary arguments The definition for a fiscal statement is a written report which quantitatively describes the fiscal health of a company. (www. investorwords. com) It consists of a poise tatter, income statements and a cash take to the woods statement. This canvas depart critically asses the uses and limitations of each of these causas of financial statements for a problem. A symmetry sheet shows the financial condition of a pargonntage at a specific date (Langemeier & Klinefelter 2008). It shows what is owned by the ancestry, what is owed and the owners partake ( bread worth) of the business.The balance sheet has three main uses. Firstly, it is used for reporting purposes as part of a limited companys annual accounts. These moldiness be shown to Companies House, HM Revenue and Customs and any sh beholders unless agreed otherwise. It is similarly used to let potential investors or lenders asses the worth of a busines s at any given time. This way they can think whether they think they should be investing specie into the business according to how solution the business is, how liquid its assets are, how the business is financed and how much capital is being used. in conclusion they can be used by the business itself to analyse how to remediate its management. There are a fewer limitations of a balance sheet as roughly appreciates of current assets are estimated (www. businesslink. gov. uk) therefore the balance sheet does not reflect a 100% immaculate financial position of a business. Also, the fixed assets in the balance sheet occupy interpreted the depreciation of the asset into consideration and so the true value is not shown.Finally, intangible assets such(prenominal) as good exit cannot be thrifty and are therefore estimated figures too and may be very inaccurate thus causing the whole balance sheet to be incorrect. and so a balance sheet is utilitarian in many ways as long as who ever is interpreting the figures takes into consideration that a few of the figures are not accurate. An income statement, also known as a pay and loss account, measures the profits or losses a business has do over a certain period of time (money-zine. com).If a business wishes to expand and ingests a bank loan they will need to produce their profit and loss accounts for the previous three years so the bank can see whether they will be able to riposte 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 help it grow. If a business can see where its strong or weak points are then it can find ways to cleanse for example by cutting down on expenses.It also enables a business to produce their income statement quickly if required and filling in their tax return easier and quicker which in turn reduces the risk of arouse for late tax payments. These financial statements are usually available to the humankind which means competitors can see how each other are doing, until now very few people understand them when all transactions are recorded in larger companies. There are also some limitations of income statements one being that its data does not tell the user anything almost what may happen in the rising or factors that may happen upon future growth of the company.It is simply limited to method of accounting 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 accelerate 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 flow statement.It records the inflow and give 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 coming from, and how it is being spent. According Hertenstein Article 26 there are three main people that want 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 complicated 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 kept in mind at the time of its use.The main limitation is that the cash flow statement only records cash transactio ns and so ignores the basic accounting concept of accruals and tems bought on credit and therefore are not commensurate for judging the profitability of a business. Also cash flow statements are prepared using historical 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 offer a solid picture of a businesss mathematical operation when compared to each other, and the users can easily 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 present quantitative data and do not address any of the qualitative economic variables such as the morale of the employees or the quality of the management team. There is soon no way of measuring these intangible assets, even though a businesss human resources are some of its most va luable assets.