What are the limitations of financial statements? What will be an ide

What are the limitations of financial statements?

What will be an ideal response?

ANSWER

When reviewing financial statements, keep in mind that accounting rules give managers discretion; thus, they may
take advantage of the leeway, as long as it doesn’t violate GAAP, to produce the high or stable earnings that investors
are looking for. Therefore, what we see from financial statements may not exactly reflect the company’s financial
situation. In other words, if two companies have the same financial condition, their financial statements can be
different, depending on how and when the managers choose to report certain transactions.