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Describe the limitations of financial statements analysis.

Posted by Ripon Abu Hasnat on Saturday, February 6, 2016 | 0 comments

Limitations of financial statements analysis are-

1. The use of estimates in allocating costs to each period. The ratios will be as accurate as the estimates.

2. The cost principle is used to prepare financial statements. Financial data is not adjusted for price changes or inflation/deflation.

3. Companies have a choice of accounting methods i.e. inventory LIFO vs. FIFO and depreciation methods. These differences impact ratios and make it difficult to compare companies using different methods.

4. Companies may have different fiscal year ends making comparison difficult if the industry is cyclical.

5. Diversified companies are difficult to classify for comparison purposes.

6. It does not provide answers to all the users' questions. In fact, it usually generates more questions!