Accounting Business Reporting for Decision Making

CHAPTER 1 Introduction to accounting and business decision making 21

1.9 Limitations of accounting information

LEARNING OBJECTIVE 1.9 Give examples of the limitations of accounting information.

Accounting information provides a wide range of information for both internal and external users. How-

ever, for decision-making purposes, other relevant business factors in addition to accounting information

need to be considered. For example, if a prospective investor was considering purchasing shares in a

company, they would spend some time analysing the financial statements of the company (i.e. looking

at accounting information). To make an informed judgement, they would also need to consider other

sources of information, such as the company’s percentage of market share, how long the company has

been in existence and the company’s social and environmental policies (if any). When making invest-

ment decisions, investors are increasingly evaluating a company’s social and environmental credentials

as well as its financial situation.

When making investment decisions, investors are increasingly evaluating a company’s social and environmental
credentials as well as its financial situation.

Additionally, users of accounting information need to consider carefully a number of limitations of

the information provided, especially in the financial statements. These limitations include the time lag in

the distribution of the information to the various users, the historical nature of accounting information

and the subjective nature of the financial statements. These will now be discussed in more detail.

Time lag

There is a significant time delay from the end of the financial year until the information reaches

users in the form of a financial report. Although the internet has assisted in decreasing the time lag,

there is often a delay of up to three months from the end of the financial year until the information

is published.