Question

a. the usefulness of financial statement in supporting the users decision making?.

b. Why financial statement must be audited by independent auditor?

c. Describe some limitations of financial statements?

Answer 1

Question A

The usefulness of financial statements vary with user to user and their needs for the financial statements. It helps the various user in this decision making in different ways. Let us discuss them one by one

1. For Potential Investors - Potential Investors are the ones those who are interested to invest in an organisation.They are interested in the financial statements to know whether the investment will be beneficial and fruitful to them or not. They are the basis for their Investment puposes.

2. Creditors and Financial Institution - They are the one who have usual interaction with business by providing them goods on credit and providing financial assistance in the form of loans. They are interested in Financial statement to know whether they should extend the credit to these companies or not or whether they will be able to repay their debts obligations or not.

3. Government Authorities- Various Government Authorities are also interested in Financial Statement to make the decision whether they should keep an eye on the business or not or whether the business is correctly compiling with Government rules and regulations.

So the various stakeholders use the financial statements in their own way to make their own judgements and take a decision based on that.

Question B

Financial Statement are those statements which are being prepared by the persons with in an organization so there are chances of window-dressing and misrepresentation in the preparation of those financial statements.If such is the case the financial statements will fail the purpose for which they are being made so to make them more reliable it becomes important that these financial statements should be audited by someone who can authenticate them and made them reliable for the various group of Stakeholders. Moreover it's is required that the fiancial statements should be audited by an Independent Auditor. Independent Auditor is the one who is not related to the organization in any way and is free from making any personal gain or interest by using his position for his own financial advantages. So it becomes necessary that financial statements prepared by an organization must be audited thoroughly by the Independent Auditor in the best possible manner and finding proper conclusions, findings and decision to make sure that the financial statements as a whole are free from material misstatements and they can form a basis for the judgements of various accounting users. After discussing vin detail we can say that the financial statements should be duly audited by the Independent Auditor to get an assurance on reliability of financial statements.

Question C

Limitations of Financial Statements are as follows

1. Inflationary Effects

If the inflation rate is relatively high the items relating to assets and liabilities will be appearing indernatebly low in the balance sheet due to lack of inflation adjustments especially in the case of long term assets.

2. No disclosures of Non Financial Issues

The financial statements always talk about the finances, accounts, profitability and return on investment none of them never talks about the effects of these business on these environmental resources and their effects on this society as a whole.

3. Dependence on Historical Costs

Financial Statements are based on their historic costs. the values of assets and liabilities change over the time but the change in their value is not accounted for except the changes in the value of marketable securities which usually got altered but what about assets like long term assets which are usually recorded at cost but not accounted for change in their value which somehow makes the Balance Sheet less reliable and misleading if large part is based on Historical Costs.

4. Based on Specific Time Period

A user of financial statements can get a wrong view of financial results or Cashflows by looking at one reporting period.It may be due to factors like sudden increase in sales etc. So for a better understanding of financial statements it is always better to look for the financial statements for consecutive years and draw a more better financial conclusion.