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LIMITATIONS OF FINANCIAL ANALYSIS
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LIMITATIONS OF FINANCIAL ANALYSIS - September 23rd, 2010

LIMITATIONS OF FINANCIAL ANALYSIS


The major limitations of financial analysis are as under:


1. Ignores the qualitative statements – Since the financial statements are concerned to the monetary matters only, the qualitative elements like quality management, quality of labor, public relations are ignored while carrying out the analysis of financial statement only.


2. Not free from bias – In many situations, the account has to make choice out of various alternatives available, e.g. choice in the method of depreciation, choice in the method of inventory valuation etc. since the subjectivity is inherent in personal judgment, the financial statement are therefore not free from bias.


3. Estimated position on ongoing concern basis – Since the financial statement are prepared on a ongoing concern basis as against liquidation basis, they report only the estimated periodic results and not the true results since the true results can be ascertained only on the liquidation of the enterprise.


4. Ignores price level changes in the case of financial areas prepared on the historical costs – In case of financial statements prepared on historical costs, the fixed assets are shown in balance sheet at historical costs less depreciation and not at the replacement value which often far higher than the value stated in the balance sheet.
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