Answer:
see below
Explanation:
Financial statements are formal records that provide information about the business's financial activities, status, condition, and position.
Limitation of Financial Statements
1. Statements are based on historical data.
Financial statements do not indicate the current worth of a company. The value of assets and liabilities are subject to change, but financial statements record them at cost. The value of assets and liabilities is not altered to reflect the market cost. Therefore, the balance sheet presents misleading reports if a large part is based on historical costs.
2. Statements are subject to personal judgment:
The values of assets, as presented in the balance sheet, are influenced by the opinions of the person preparing them. For example, depreciation and amortization of assets depend on the personal judgment of the accountant.
3. Inflationary effects
Financial statements do not consider the effects of inflation. The reports and the statements' values are not the real values as inflation is known to erode a currency's strength.
4. Statements do not record Intangible assets.
Not recording intangible assets such as intellectual properties underestimate the value of a business.
