Question

discuss the uses and limitations of the statement of financial position for decision making

Answer 1

Financial position is another name of the balance sheet of an organization. Balance sheet contains the information about assets, liabilities and capital of the company as on particular date.

Uses of financial position: -

1.It is useful in ascertaining the financial position of the company as on particular date by showing assets and liabilities of the company on a specific date.

2. It is also helpful in disclosing the solvency of the business by showing assets available for paying the liabilities.

3.It helps management in computation various ratios for effective management of business.

4. Shareholders use it for examining the financial soundness of the company.

5. Moneylenders use it to judge the assess the credit worthiness of the company.

Limitation of financial position: -

1.It can be misleading because it represents the financial position as on particular date and organizations can do transactions to alter the actual financial position.

2. It fails to consider non-financial factors hence it gives incorrect view of financial position.

3. It shows assets on historical basis which provides misleading picture about the organization’s assets.

4. Internally generated assets are not reported in balance sheets which gives distorted view of balance sheet.

5. Mere balance sheets is not useful for decision making. There is a need to analyse income statement, audit report etc.

To conclude, it is clear that statement of financial position has both merits and demerits for decision making.