On The Limitation Of Financial Accounting Information

As an information system, financial accounting mainly pfers financial information to the market. However, any information has its inherent limitations. It is of vital importance to correctly understand the inherent limitations of financial accounting information and to improve decision-making efficiency.

From the characteristics of financial accounting, we can see the limitations of information. 1., financial accounting is mainly based on past pactions and events. The information provided is mainly the information in the past. Users' decisions always want to get more information for the future through financial reports. The traditional financial reporting information based on historical cost is more and more not suited to the requirements of economic decision-making for information relevance.

Transactions and events in the past are more definite, and many economic activities of enterprises are uncertain. Especially recently, because of financial innovation, the risks and rewards of derivative financial instruments are pferred at the time of signing contracts. For example, according to the implementation principle, the measurement is obviously inconsistent with the reality when the paction is completed. At the same time, due to the uncertainty of risk and reward, it also brings great difficulties to the pfer measurement. Besides, some useful information, such as the value change of holding assets, has not been confirmed in the report because it has not yet been realized and has not yet formed pactions or matters.

At the same time, due to the market innovation and the diversification and long-term sales, such as installment sales and product financing, it is difficult to confirm, measure and report with traditional financial methods.

2., the use of monetary measurement in financial accounting statistics has its own limitations.

This kind of summary and offset will inevitably cover some contradictions and problems. Second, the monetary stability hypothesis itself is not established under the condition of severe inflation. Therefore, financial reports based on currency stability can not reflect the financial situation and operating results of enterprises in a sustained and dramatic price change. 3. At present, there are many information that is difficult to use monetary measurement but useful for decision-making, and is excluded from financial statements and even financial reports. For example, in highly skilled industries, human resources and intellectual property rights are great wealth for enterprises, but the value of human resources can not be reflected in financial reports, and the real value of intellectual property is also difficult to show in intangible assets. (1) many data in financial reports are aggregated and aggregated, and the sum of pactions or events is aggregated.

3., the historical information provided by financial accounting firms often only focus on the calculation and reporting of business performance, and the information related to decision-making, such as financial status, payment ability, cash information and so on, is difficult to get through traditional financial reports.

The 4. forms are the essence.

If the economic essence of an asset is that it can bring future economic benefits to the enterprise, the financial report reflects the historical cost of assets and seldom uses the present value to measure assets.

The 5. financial report is the crystallization of the work of the financial personnel, and inevitably uses the necessary estimation and judgment, so the authenticity of the financial report information can only be relative rather than absolute.

Two, from the contents of financial accounting information to see the limitations of information, financial information, in addition to the financial statements, including financial information obtained through financial analysis.

If ratio analysis is the most common financial analysis, through the analysis of financial ratios, we can also reveal the limitations of traditional financial information, and present specific explanations.

The limitation of the 1. management results information.

Business results are generally reflected through the profit and loss account.

Profit and loss is a comprehensive expression of the economic benefits of an enterprise. It is usually regarded as the difference between the realized income and the related historical cost that the enterprise has achieved in a certain period of time.

The profit and loss account is compiled on the basis of historical cost and currency stability.

The basis of the establishment itself has its logical limitations: (1) because of the influence of the principle of income realization, the current profit and loss statement can only reflect the profits that the enterprise has already realized, but can not include unrealized gains, which are often useful information for the users of the statements to make decisions.

Second, since accounting profit is only a value added form of net assets in value form, it is not possible to cause false profits or losses if the actual production capacity of enterprises is not maintained.

(3) due to the inherent defects inherent in the historical cost principle, the cost is measured at historical cost, and the income is matched to the relevant cost. This inevitably leads to the matching of the current income with the historical cost (possibly the pre capital), resulting in the inconsistency of the internal logic, which makes it difficult to achieve the purpose of the matching principle.

2. limitations of financial situation information.

Financial position is generally reflected through the balance sheet.

The balance sheet mainly provides static indicators of assets, liabilities and owners' rights and interests and their relationships at a certain point in time. It can be used to analyze the economic resources and distribution of enterprises, the structure of corporate interests, liquidity and financial strength.

However, the balance sheet itself also has limitations: (1) the recognition and measurement of assets and liabilities involve human estimation, such as provision for bad debts and depreciation of fixed assets. Therefore, the quality of information provided by the balance sheet is inevitably affected by the accuracy of these human estimates.

Second, because the use of accounting procedures has great selectivity, different enterprises allow different accounting procedures or methods to be selected.

3. There is no uniform standard for the measurement of asset items because of adopting different valuation methods and accounting principles, which may lead to the loss of comparable basis on the balance sheet and become incomprehensible, which undoubtedly affects the relevance of accounting information.

(4) many enterprises which have great economic value are not included in the balance sheet, such as goodwill, because it will violate the generally accepted accounting principles.

Because many assets are either undervalued or not included in the report, the actual assets owned by the firm itself are often distorted.

(5) price changes make the assets and liabilities which are measured by historical cost seriously deviate from reality and may distort the financial situation of enterprises.

3. limitations of financial ratios information.

Financial ratios are calculated according to the two or more items in the financial statements, which can further reveal the financial situation and business results of enterprises and meet the needs of business investment decisions. Due to the inherent limitations of financial statements, financial ratios information also has its inherent limitations: (1) in essence, the analysis of financial ratios is not rigorous in itself.

The choice of ratios, the exact definition of ratios, and the interpretation of ratios are largely judgmental and hypothetical, and the ratio analysis is to ask questions rather than solve them.

2. For the real new wealth created by enterprises, profit and loss accounts tend to overestimate profits. For real assets owned by enterprises, the value of net assets is often underestimated. When we use the value of a profit and loss account and the value of a balance sheet, it will inevitably create contradictions.

Third, because the balance sheet reflects the financial situation of a specific time point of an enterprise, such as the end of the fiscal year, but it can not reflect the financial situation at other times of the fiscal year, based on this analysis, there may be misunderstanding.

(4) calculating the ratio of the value of a profit and loss account and the value of a balance sheet. Another problem is that the balance sheet reflects the index at the end of the accounting period, and the profit and loss account reflects the index of the whole accounting period.

If the value of the balance sheet is not representative during the accounting period, the calculated ratio will inevitably be misleading.

In spite of the fact that the accounting statements in strict accordance with generally accepted accounting standards are required to ensure the comparability and consistency of accounting information, because accounting information is inevitably influenced by subjective factors, even if the same paction has different accounting treatments in different enterprises, it is bound to exacerbate the defects caused by the ratio analysis of financial information.