Limitations of financial statement analysis

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The primary limitation of financial statements is its heavy reliance on historical costs, indifference to inflation, prone to frauds, easily manipulated, etc. Financial statement limitations are relatable with current markets looking at the accounting and financial fraud in the news every day. Financial statements are a derivative of bookkeeping and accounting. While accounting, an accountant records the transaction at cost.
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Financial Statement Limitations

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14 Limitations of Financial Statements | Investor's Caution Area

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. 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 their analysis will also be wrong which may mislead the user in making decisions. 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. Qualitative aspects Then financial statement analysis provides only quantitative information about the company's financial affairs. However, it fails to provide qualitative information such as management labor relation , customer's satisfaction, management's skills and so on which are also equally important for decision making.
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Limitations of Financial Statements

By Harshada Khot Leave a Comment. Accounting Tutorials. Financial statements provide information or record of finances of the Company their business activities, projects available, etc.
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Financial ratio analysis is one of the most popular financial analysis techniques for companies and particularly small companies. Ratio analysis provides business owners with information on trends within their own company, often called trend or time-series analysis, and trends within their industry, called industry or cross-sectional analysis. Financial ratio analysis is useless without comparisons. Companies even benchmark different divisions of their company against the same division of other benchmark companies.
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