Question

Which of the following is a limitation of the balance sheet?

a. many items that are of financial value are omitted
b. judgments and estimates are used
c. current fair value is not reported
d. all the above

Answer 1

All mentioned options are limitations of the balance sheet: items of financial value may be omitted, judgments and estimates may be used, and it may not report current fair values. The correct option is D.

Step-by-step explanation:

The question concerns the limitation of the balance sheet, an important financial statement in accounting. The balance sheet provides a snapshot of a company's financial standing at a particular point in time by listing its assets, liabilities, and shareholder equity. However, it has several limitations:

• Many items of financial value may be omitted, as not all resources with economic value are recognized as assets.
• Judgments and estimates are necessary since certain figures on the balance can't be measured with complete accuracy and require estimation.
• The balance sheet typically does not report the current fair value of assets and liabilities, instead often listing assets based on historical cost.

Therefore, the correct answer to the student's question is 'd. all the above', as all of these are recognized as limitations of the balance sheet. It's essential for students studying finance and accounting to understand these limitations to better analyze and interpret financial statements.