Limitations of financial analysis

Limitations of Financial Statement Analysis

Although analysis of financial statement is essential to obtain relevant information for making several decisions and formulating corporate plans and policies, it should be carefully performed as it suffers from a number of the following limitations.

  1. Mislead the user
    the accuracy of financial information largely depends on how accurately financial statements are prepared. If their preparation is wrong, the information obtained from theiranalysiswill also be wrong which may mislead the user in making decisions.
  1. Not useful for planning
    since financial statements are prepared by using historical financial data, therefore, the information derived from such statements may not be effective in corporate planning, if the previous situation does not prevail.
  1. Qualitative aspects
    then financial statementanalysisprovides only quantitative information about the company’s financial affairs. However, it fails to provide qualitative information such as management labour relation, customer’s satisfaction, and management’s skills and so on which are also equally important for decision making.
  2. Comparison not possible
    The financial statements are based on historical data. Thereforecomparativeanalysis of financial statements of different years cannot be done as inflation distorts the view presented by the statements of different years.
  3. Wrong judgement
    The skills used in theanalysiswithout adequate knowledge of the subject matter may lead to negative direction. Similarly, biased attitude of the analyst may also lead to wrong judgement and conclusion.The limitations mentioned above about financial statement analysis make it clear that the analysis is a means to an end and not an end to itself. The users and analysts must understand the limitations before analyzing the financial statements of the company.
Amit Kumar
Amit Kumarhttp:////hmhelp.in
Hii! Welcome to My digital home, I am Amit – an almost no-code generalist, helping businesses with their online presence using WordPress and other tools and simplifying some of their operations with ideas and automation. A psychology and philosophy geek by interest and a graduate in Hospitality Management. I founded hmhelp during college, which got me into WordPress. I am a highly motivated and results-oriented professional with a proven track record of success in the hospitality industry. I’m also a Digital Marketing Enthusiast with significant academic and practical experience managing digital content across multiple platforms. Skilled at SEO optimization, developing digital content for social media platforms, I offer extensive knowledge of multiple software programs, strong attention to detail, and extraordinary communication skills. If you are interested in talking about any of the topics I have mentioned on my website, you are in the right place. You can contact me or learn more about what I do. You can also connect with me on social networks.

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