Question

Which sentences explain the limitations of financial statements?

Financial Statements - Limitations
The business's balance sheet, income statement, cash flow statement, and statement of retained earnings are some of the important
statements. Financial statements are used for comparisons of the performance of companies belonging to similar industries. Estima
for calculating financial statements are subjective as they involve management's foresight to arrive at different values. Historical data
commonly used to measure assets. The opportunity cost of using the assets are not taken into account while preparing financial state

Answer 1

see below

Step-by-step 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.