Question

What are the major limitations of the balance sheet?

1) Lack of information on the value of intangible assets
2) Difficulty in comparing companies of different sizes
3) Inability to reflect changes in market value
4) Inaccuracy due to estimates and judgments
5) Cannot be fixed

Answer 1

The major limitations of the balance sheet include a lack of information on intangible assets, difficulty in comparing companies of different sizes, inability to reflect changes in market value, inaccuracy due to estimates and judgments, and the inability to be fixed until the next reporting period.

Step-by-step explanation:

The major limitations of the balance sheet include:

1. Lack of information on the value of intangible assets: Balance sheets do not include the value of intangible assets such as brand value or intellectual property, which can be significant for some companies.
2. Difficulty in comparing companies of different sizes: Companies of different sizes may have different levels of assets and liabilities, making it difficult to compare their balance sheets directly.
3. Inability to reflect changes in market value: Balance sheets are prepared using historical cost, which may not reflect the current market value of assets and liabilities.
4. Inaccuracy due to estimates and judgments: Some values on the balance sheet, such as the value of inventory or provision for bad debts, are based on estimates and judgments and may not be completely accurate.
5. Cannot be fixed: Once a balance sheet is prepared, it cannot be changed until the next reporting period, meaning it may not always reflect the current financial position of a company.