Chapter 6, Problem 6.1Q

What are the limitations of the balance sheet?

To determine

To explain: The limitations of balance sheet.

Answer to Problem 6.1Q

The limitations of balance sheet are as follows:

• Some costs are recorded at historical cost.
• Ignorance of qualitative factors.
• The various assets are valued according to the different rules.

Explanation of Solution

Balance Sheet:

Balance sheet is a part of financial statements that lists company’s assets, liabilities and shareholders’ fund. It is prepared at the end of accounting period and informs about company’s financial position on that day.

• The assets which are presented in the balance sheet at historical costs. The presentation at the historical cost doesn’t represent the fair value of the balance sheet.
• The qualitative factors such as performance of the employee, the honesty and delegacy of the employees towards the goal fulfillment of the company all are not included in the balance sheet.
• There are many of the different methods are used for the valuation of assets by the different companies which creates the inconsistency in financial statements.

Conclusion

Hence, the asset presentation in historical cost is the main limitation of the balance sheet.