Critically Assess the Uses and Limitations of Financial Statements Essay

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Critically assess the uses and limitations of financial statements
The definition for a financial statement is a written report which quantitatively describes the financial health of a company. (www.investorwords.com)
It consists of a balance sheet, income statements and a cash flow statement. This essay will critically asses the uses and limitations of each of these types of financial statements for a business.
A balance sheet shows the financial condition of a business at a specific date (Langemeier & Klinefelter 2008). It shows what is owned by the business, what is owed and the owner’s share (net worth) of the business. The balance sheet has three main uses. Firstly, it is used for reporting purposes as part of a limited …show more content…
The final type of financial statement is a cash flow statement. It records the inflow and outflow of cash over a period of time. The cash flow statement allows investors to understand how a company's 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 business’s 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 transactions and so ignores the basic accounting concept of accruals and items bought on credit and therefore are not suitable 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
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