Question

What is a limitation of the income​ statement? A. It only reports financial standing as of...

What is a limitation of the income​ statement?

A.

It only reports financial standing as of a point in time.

B.

It requires extensive judgement and estimation in order to draw conclusions.

C.

It does not allow users to judge risk.

D.

It has no predictive value.

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Homework Answers

Answer #1

Option B is correct.
It requires extensive judgement and estimation in order to draw conclusions.

Explanation:
One of the limitations of the income statement is that income is reported based on accounting rules, judgements and forcasts and often does not reflect cash movement.
It is prepared using various accounting policies and methods. These are subject to bias from the management or the business owners. The forecasts are also judgmental in nature. If the accounting methods are regularly changed or accounting policies are implemented differently as per different cases, the income statement is bound to give predictive value and deviate a lot from the true values.

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