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…
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