Question

Write any two limitations of financial statements.

Hint:

Financial statements provide a snapshot of a company's financial health but should be used in conjunction with other tools to assess its long-term prospects.

Answer 1

Step 1: Understanding Limitations of Financial Statements.
Financial statements provide useful information about a company's financial performance and position. However, there are some limitations associated with these statements.
Step 2: Two Key Limitations:
1. Historical Nature: Financial statements are based on historical data, meaning they reflect past performance and do not necessarily predict future trends or changes in market conditions.
2. Non-Financial Information: Financial statements do not capture non-financial aspects such as employee satisfaction, customer loyalty, or market reputation, which can be important for evaluating a company's overall health.
Step 3: Conclusion.
While financial statements are essential tools, they do have limitations, including their historical nature and the exclusion of non-financial factors.