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Questions
State any one limitation of Analysis of Financial Statement.
State any four limitations of ‘Analysis of Financial Statements.’
State the limitations of analysis of financial statements.
Solution 1
Limitations of Financial Statement Analysis:
a) Ignores Qualitative Elements- Financial Statement Analysis ignores qualitative elements like
management skills, growth prospects, labour relations, etc.
b) Not Free from Personal Bias- Due to an involvement of personal judgments while making decisions regarding methods of depreciation, the method of inventory valuation, etc. This makes the financial statements not always free from personal bias.
c) Variations in Accounting Policies- Inter-firm comparison becomes little difficult when different
accounting policies are being followed by different enterprises.
d)Ignores Price Level Changes- Since, the analysis of financial statements are always prepared on
the historical cost basis, thus, it ignores the price level changes.
Solution 2
The following points explain the shortcomings of the financial statement analysis.
- Ignores Changes in the Price level- The financial analysis fails to capture the change in price level. The figures of different years are taken on nominal values and not in real terms (i.e. not taking price change into considerations).
- Misleading and Wrong Information- The financial analysis fails to reveal the change in the accounting procedures and practices. Consequently, they may provide wrong and misleading information.
- Interim and Final Picture- The financial analysis presents only the interim report and thereby provides incomplete information. They fail to provide the final and holistic picture.
- Ignores Qualitative and Non-monetary Aspects- The financial analysis reveals only the monetary aspects. In other words, these analyses consider only that information that can be expressed only in monetary terms. These analyses fail to disclose managerial efficiency, growth prospects, and another non-operational efficiency of a business.
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| Equity Share Capital | 1,60,000 | 1,60,000 | Fixed Assets | 2,40,000 | 2,88,000 |
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| Reserve and Surplus | 40,000 | 48,000 | Current Assets | 1,20,000 | 96,000 |
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| Unsecured Loan | 40,000 | 72,000 | |||
| Current Liabilities | 40,000 | 72,000 | |||
| 4,00,000 | 4,24,000 | 4,00,000 | 4,24,000 |
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| To Opening stock | 20,000 | By Sales | 1,20,000 |
| To Purchases | 90,000 | By Closing Stock | 30,000 |
| To Carriage inward | 500 | ||
| To Wages | 10,000 | ||
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| Total | 1,50,000 | Total | 1,50,000 |
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| To Selling expenses | 10,000 | ||
| To Finance expenses | 3,000 | ||
| To Net Profit c/d | 4,000 | ||
| 29,500 | 29,500 | ||
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Cr. | |
| Particulars | Amount (₹) |
Particulars | Amount (₹) |
| To Opening stock | 50,000 | By Sales | 6,00,000 |
| To Purchases | 4,50,000 | By Closing Stock | 1,50,000 |
| To Carriage | 20,000 | ||
| To Direct expenses | 30,000 | ||
| To Wages | 50,000 | ||
| To Gross Profit c/d | 1,50,000 | ||
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