Financial statement analysis is a process which uses to analyze the company financial statement. It serves as an important sources that provide crucial information for the investor, shareholders, managers and other interested parties for future references on the company overall performance for decision making and also to determine the overall financial health of the business.
However, there are several limitations to the financial statement analysis. One of the limitations will be the figures in the financial statement is based on the historical data. The transactions are initially recorded at cost. The balance sheet figures provided would not be completely accurate as the value of assets and liabilities will change over time. For instance, the market value of the fix assets will be depreciated over the years which causes the value of the total asset to reduce. Therefore, if a large portion of the amount presented is based on historical costs, the balance sheet may be misleading. In addition, the inflation rate may also distort the balance sheet of the company when the inflation has occurred in one of the periods of the balance sheet when making a comparison. When the inflation rate is high, the value of the assets and the liabilities will be significantly low as they are not adjusted for the inflation. Thus, the comparison between two different periods of balance sheet may not be accurate to obtain the results.
Another limitation would be the company may use window dressing to make their financial statement look good and indicate the company is standing a better position in the market. This may be subject as a fraud as the company manipulates the figures in their annual reports to make their company look like having the potential to invest and is continually growing. The financial statement reported may also contain bias judgments as it is prepared by humans. For example, the company’s management team may deliberately distort the results presented if there are undue pressures to report good results, such as the management team would be given an incentive if the reported sales level is increasing. This may cause the public to misstate the company position and the information used to determine is not accurately reflect the company financial performance.
The following limitation is that it is difficult to compare one company with another company if both of them are using a different accounting practice. This is because different companies use different accounting method to measure their company inventory values and depreciation values. Some company may use the last-in-first-out (LIFO) inventory method or first-in-first-out (FIFO) method. Besides that, the company may also use different depreciation method which may affect the company’s financial statements when making a comparison. This may distort the comparison of both companies as the methods using are completely different and the results obtained may not be accurate. Therefore, it is difficult to have an effective comparison between the two different companies as both of them are using different accounting practices even the comparison of the company is within the same industry.


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