Question
Discuss any three limitations of financial analysis.
✓
Answer
Following are the main limitations of financial statement analysis:
$(1)$ Historical data
$(2)$ Ignorance of inflation
$(3)$ Absence of qualitative aspect
$(4)$ Based on presentation of financial statement
$(5)$ Personal opinion
$(6)$ Window dressings
$(7)$ Discloses only symptoms of problem.
Discussion of three limitations of financial analysis:
$(a)$ Historical data:
$(1)$ Historical data
$(2)$ Ignorance of inflation
$(3)$ Absence of qualitative aspect
$(4)$ Based on presentation of financial statement
$(5)$ Personal opinion
$(6)$ Window dressings
$(7)$ Discloses only symptoms of problem.
Discussion of three limitations of financial analysis:
$(a)$ Historical data:
- Financial accounts are prepared on the basis of past transaction, so we can say that financial statement is based on historical information.
Based on analysis of financial statement, future of business entity can be forecasted. - So, here estimation is possible which is biggest limitation.
- Factors like honesty, expertise, contribution of workers for development of business and loyalty of management towards business entity etc. are not considered which have relation with efficiency of business.
- This is again a limitation.
- Many a times, the information disclosed in financial statement is not found to be correct.
- Accounts are prepared on the basis of incorrect information rather than correct information.
- Thus, decisions made by the stakeholders stand incorrect.his is also a limitation.
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