The Limitations of Financial Statement Analysis
Author version: earlier one of my article "Objectives of the firms or companies financial statements analyses "I have described the importance of financial statement analysis, I believed that financial statements analysis can help the government agencies to analyze the taxation due to the company. Moreover, company can analyze its own performance over the period of time through financial statements analysis. Financial statement analysis is highly useful tool although it has some limitations, this article" the limitations of financial statements analysis" I have tried to presented the limitations in essay. Clear & classified that readers will be understand effortlessly,
Financial statements:
We know that financial statements is a written report which quantitatively describes the financial condition of a firm or company, financial statements report includes the balance sheet, income statement, statement of changes in net worth and statement of cash flow. a financial management system is the creation of financial statements. To manage proactively, you should plan to generate financial statements on a monthly basis.
Financial statement analysis
Financial statement analysis is an evaluative method used by interested parties such as investors, creditors, and management to evaluate the past, current, and projected conditions and performance of the firm or company. Ratio analysis is the most common form of financial analysis. It provides relative measures of the firm's conditions and performance, financial statement analysis more effective for decision making. Financial statements record financial data; & information more useful to investors, shareholders,
Limitations
On the whole financial statements are foundation on historical costs and as such the blow of price level modifies is completely disregarded. They are temporary reports. The basic nature of financial statements is historic. These statements are neither complete nor accurate. They imitate only financial dealings of a business,
01. The business financial situation concern is pretentious by some factors economic, social and financial, but financial factors are being recorded in these financial statements. Economic and social factors are left out. Thus the financial position released by these statements is not right and truthful.
02. The profit exposed by the Profit and Loss Account and the financial position released by the Balance Sheet cannot be precise. They are fundamentally short-term reports.
03. Specifics which have not been evidenced in the financial volumes are not represented in the financial statement. Only quantitative factors are taken into account. But qualitative factors such as reputation and prestige of the business with the public, the efficiency and loyalty of its peoples, honesty of management etc. do not materialize in the financial statement.
04. A lot of items are missing to the personal finding of the accountant. For case; provision of reduction, stock assessment, bad debts condition etc. depend on the own decision of accountant.
05. FSA is limited by the actuality that financial statements are "window dressed" by original accountants. Window dressing refers to the sarcasm or exaggeration of financial information.
06. Dissimilar companies use dissimilar accounting standards for register, Depreciation, etc. consequently evaluating their financial ratios can be confusing FSA just presents a few fixed snapshots of a business' financial shape but not the absolute affecting image.
07. On account of meeting of management the income statement may not released accurate income of the business as likely losses are measured while likely incomes are unobserved.
08. The unchanging assets are exposed at cost less depreciation on the basis of "going concern concept" although the cost sited on the fixed assets may not be the same which may be realized on their rummage sale.
09. The data enclosed in the financial statements are dumb; they do not articulate themselves.
The human decision is always concerned in the explanation of declaration. It is the forecaster or users who offers speech to that information and create them to verbalize.
Questions and Answers
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assessment of one company with a different can give valuable clues about the financial strength of an organization regrettably
,differences in accounting methods between companies occasionally create it difficult to evaluate the companies financial data
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