Limitations of Financial Reports

• Normalised earnings are earnings adjusted to take into account fluctuations in the economy or remove one-time influences like selling an asset

  Limitation: If businesses do not normalise their earnings. Investors do not get a clear or valid indication of the business and make poor decisions.
• Capitalising expenses refers to recording an expense as an asset on the balance sheet instead of as an expense on the income statement

  Limitation: Understates the expense and overstates the profits as well as the assets of the business. Examples include, research and development, and development expenditure.
• Valuing Assets valuing an asset as the historical cost (cost asset was bought), rather than market value cost or vice versa. Fluctuations occur differently due to depreciation, appreciation or inflation
• TIming Issues is adjusting the timing of inflows and debt repayments on statements to make the business appear more profitable. They can delay revenue until next year to pay less tax and continue every year.

  Limitation: A business can change the timing to overstate or understate profits for a particular time period. This could present an inaccurate picture of the business.
• Debt Repayments : The balance sheet only states what debts are due, not when they’re due, and hence a business may not truly have the cash to pay them. Reports can be limited as they do not have capacity to specific information.
• Notes to Financial Statements is Additional information normally at the end of the financial reports. These notes provide additional information and details about items included in the balance sheet and income statement. These are subjective, rather than objective

  The notes would provide a deeper understanding of the transaction and why it was recorded in a particular way.
• Limitations to Financial Reports Include:

  Normalised Earnings

  Capitalising Expenses

  Valuing Assets

  Timing Issues

  Debt Repayments

  Notes to Financial Statement