Balance sheet, income statement, and statement of cash flows
1) The Balance sheet is a statement of assets and liabilities of the business as on a particular date. It is like a snapshot of the position of the business on a certain date. It allows the users of the statements to see at a glance what the business owns, the costs at which they are held and the liabilities towards outsiders. The Balance sheet also shows the equity of the owners of the business. A major limitation of the balance sheet is that it reports only the assets that have been acquired. Most of these assets are reflected at historical cost which has lost its irrelevance. Thus, land is reported at its historical cost whereas the actual price may have greatly appreciated. Many people hence argue that the balance sheet does not depict a true state of affairs.
The Income statement of a business, reflects the expenses and revenues of the business over the course of a period generally a financial year. It breaks down the activities of the business into expenses and revenues. The various expenses are recorded and the various incomes are reflected in the statement. The net result is either a profit or loss which summarises the financial performance of the Company. It shows both operating and non-operating activities of the business. A major limitation of the Income statements is that the Company can manipulate the figures to paint a rosy picture of the performance. The accounting policies can be changed to alter the amount of expenses and revenues reported in the Income statement. Another limitation of the Income statement is that it is based on many assumptions and estimates which may not be accurate. Further, only those items whose value can be objectively measured are considered in the Income statement.
The Cash flow statement is a statement that depicts the cash position of the Company. It summarises the cash inflows and outflows from various activities of the business. It break down the analysis into investing, operating and financing activities. The Cash from operations measures how much cash is generated from the operations of the business. The cash from investing activities reports the amount of cash generated from investing activities like interest on investments. The cash from financing activities reports the changes in debt, loans or dividends. The limitation of cash flow statement is that it shows only cash generating activities and accrued incomes are ignored. Thus it does not give a picture of the actual activities of the business. It is not useful for reporting the profitability of the business since only those expenses and revenues are reported which have a cash impact.