Question

Critically evaluate the pros and cons of the following statements:

    1. Financial statements are useless because they are incomplete. Not all assets or liabilities are included.

    2. Financial statements are useless because they present assets at their historical costs rather than at their fair market values

Answer 1

Financial statements includes:

Income statement, Balancesheet ,Cash flow statement

There are 2 statement about Financial statment there evaluation can see as follows:

1. Financial statements are useless because they are incomplete. Not all assets or liabilities are included.

Asset and liabilities are included in balance sheet .there are some asset and liabilities which are not included in balancesheet which are known as Off-Balancesheet items. assets or liabilities that do not appear on a company's balance sheet. Although not recorded on the balance sheet, they are still assets and liabilities of the company.

Pros

1)It creats liquidity for business

2) When any company purchase large assets by debt finance,it is less desirable for investor and lenders so off balancesheet help them to mainatin there liquid ratio

3) Increase financial position of organisation

4) Liability don't have to record because no debt or shareholder equity produce

5) Capital expenditures related to the assets used are recorded to the books of the lender.

Cons:

1) Actual Liability of company is much more than compare to shown to shareholder ,creditor ,investor

2)Clear picture of comapny is not visible.

2. Financial statements are useless because they present assets at their historical costs rather than at their fair market values

Historical cost means Original cost of that asset and fair market value means current market price of asset.

Historic cost method is used under GAAP principle for fixed asset.

Pros

1)It prevents overstating the value of Asset

2) It is easy to calculate the selling value of asset .

3) Fixed asset cost can be checked by invoice.

4) It gives constant Price.

Cons:

1) Fixed asset values become quickly out of date.

2) Depreciation charge is unrealistically low.

3) Users are often interested in current values not past