Limitations of the balance sheet

Which of the following is not a limitation of the balance sheet?

A. In periods of inflation, the amounts reported show the lack of purchasing power of the assets and liabilities.

B. Failure to include all of a company’s economic resources and obligations.

C. Many of the amounts reported are based on estimates, subject to change valuing assets and liabilities.

D. Using historical costs do not help in assessing a company’s future cash flows

Answer: A (In periods of inflation, the amounts reported show the lack of purchasing power of the assets and liabilities).

Limitations of the Balance sheet

• Balance sheets do not show the actual value of assets. Historical cost is criticized for its inaccuracy since it may not reflect the current market valuation.
• Some of the current assets are valued on an estimated basis, so the balance sheet is not in a position to reflect the actual financial position of the business.
• The balance sheet cannot reflect those assets that cannot be expressed in monetary terms, such as skill, intelligence, honesty, and workers' loyalty.