Question

explain the limitation of financial statements and why ethics, ethical behavior and trust play an important role in financial decisions

Answer 1

Limitations of financial statements are as follows:-

1.Dependence of historical costs - Financial statements are based on historical costs which is not properly reflective of updated figures.

2 . Inflationary effects-the financial statements does not account for any inflation so,it is not updated with the current figures.

3.No discussion of non financial issues-financial statements only record items which are of monetary nature.The qualitative aspects are not recorded into the books of accounts.

4.Comparability-financial statements of different companies are not comparable with each others as they adopt different kinds of accounting assumptions and different sets of accounting principles and operates under different circumstances.

5.Future prediction -financial statements cannot be used as a tool for predicting future as it is confined with past data.

General ethical norms encompass truthfulness, honesty, integrity, respect for others,fairness and justice.Ethical decesion plays a critical role in financial decision making.The ethical organisation always commands a premium to other organisations because investors place a very high reliance on Corporate governance of such organization.Business ethics are very important in contemporary world which promotes transparency in decision making. It is highly important for survival of a business in the long term.