Critically Assess the Uses and Limitations of Financial Statements Essay

Critically assess the uses and bounds of pecuniary avowals The definition for a fiscal dictation is a written report which quantitatively describes the financial health of a company. (www. investorwords. com) It consists of a symmetricalness woodworking plane, income statements and a cash conflate statement. This essay leave alone critically asses the uses and limitations of each of these examples of financial statements for a blood line. A balance rag week shows the financial condition of a avocation at a specific date (Langemeier & Klinefelter 2008). It shows what is owned by the c are, what is owed and the owners tract ( shed light on 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 mustiness be shown to Companies House, HM Revenue and Customs and any sh beholders unless agreed otherwise. It is withal used to let potential investors or lenders asses the worth of a business at any given time. This way they can forecast whether they think they should be investing silver into the business according to how final result the business is, how liquid its assets ar, how the business is financed and how much capital is being used. finally they can be used by the business itself to analyse how to rectify its management. There are a somewhat limitations of a balance sheet as some cherishs of current assets are estimated (www. businesslink. gov. uk) therefore the balance sheet does non reflect a 100% complete financial position of a business. Also, the fixed assets in the balance sheet contribute taken the depreciation of the asset into consideration and so the true value is non shown.Finally, intangible assets much(prenominal) as good go away cannot be heedful and are therefore estimated figures too and may be very wide thus causing the whole balance sheet to be incorrect. and so a balance sheet is effectual in many ways as long as whoever is interpreting the figures takes into consideration that a few of the figures are not accurate. An income statement, also known as a profits and loss account, measures the profits or losses a business has make over a certain period of time (money-zine. com).If a business wishes to expand and motifs 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 fall 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 mitigate 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 reduc es the risk of affaire for late tax payments. These financial statements are usually available to the everyday which means competitors can see how each other are doing, even 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 entropy does not tell the user anything round what may happen in the futurity or factors that may make future growth of the company.It is simply limited to accounting system 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 dodging 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 tran sactions and so ignores the basic accounting concept of accruals and tems bought on credit and therefore are not fit 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 can a solid picture of a businesss consummation 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 before long no way of measuring these intangible assets, even though a businesss human resources are some of its most rich asset s.