Question

select all that apply
which of the following are limitations of financial statements?

the fact that financial statements are not adjusted for the impact of inflation
the fact that financial statements do not reflect opportunity costs
the use of estimates in the accounting process
the fact that assets must be equal to liabilities plus stockholders equity
the use of the cost principle
the use of the matching concept and accrual accounting to measure income

Explanation:

1. "The fact that financial statements are not adjusted for the impact of inflation": Financial statements (using historical cost) don’t account for inflation, so this is a limitation as it distorts real value over time.
2. "The fact that financial statements do not reflect opportunity costs": Opportunity costs (benefits foregone) are not recorded in financial statements, limiting their ability to show all economic costs.
3. "The use of estimates in the accounting process": Estimates (e.g., for depreciation, bad debts) involve judgment and can introduce subjectivity/error, limiting precision.
4. "The use of the cost principle": Recording assets at historical cost (not current value) can make statements less relevant for decision - making about current worth.
5. "The use of the matching concept and accrual accounting to measure income": Accrual/matching rely on estimates (e.g., revenue recognition timing, expense matching) and can lead to earnings management or less - accurate short - term income representation.

The option "The fact that assets must be equal to liabilities plus stockholders' equity" is the accounting equation (a fundamental principle, not a limitation).

Answer:

• The fact that financial statements are not adjusted for the impact of inflation
• The fact that financial statements do not reflect opportunity costs
• The use of estimates in the accounting process
• The use of the cost principle
• The use of the matching concept and accrual accounting to measure income