The limitation of the statement of financial position is: the valuation of items at historical cost. This is option D. The statement of financial position is also known as a balance sheet, contains the company's assets, liabilities, and equity at a specific point in time. It shows how much a company owes and what it owns at that specific time.
The statement of financial position has the following limitations: Historical cost valuation: Since the balance sheet presents assets at historical cost, it may not represent the actual value of the asset. Changes in the market value of the asset may not be reflected in the balance sheet. Presentation of intangible assets: The company's intangible assets such as goodwill, patents, copyrights, and so on may not be reflected in the balance sheet, resulting in an understatement of the company's actual value. Inaccuracy of the valuation: the assets and liabilities are estimated, meaning that they are subject to change. The estimates may be inaccurate, resulting in an inaccurate balance sheet.The balance sheet does not depict future cash flows:
The statement of financial position only depicts the present financial condition of the company, not the company's future financial condition. As a result, it is not a reliable predictor of future cash flows. Evaluation of capital structure: The balance sheet, in and of itself, does not provide information on the company's capital structure, which can be a significant factor in the company's financial performance. Computation of rates of return: The statement of financial position does not provide data on profits or revenue, which are required to compute a company's return on investment (ROI).
To know more about goodwill refer to: