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!
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The uses/ objectives of financial statement analysis are as follows
1. Assessment of Past Performance: Financial statement analysis judging management's past performance and opportunities of future performance like operating expenses, net income, cash flows, return on investment, etc.
2. Assessment of current position: Financial statement analysis shows the current position of the assets liabilities.
3. Prediction of profitability and growth prospects: It helps in assessing and predicting the earning prospects and growth rates of earning and judging earning potential of business enterprise.
4. Prediction of bankruptcy and failure: It is an important tool in assessing and predicting bankruptcy and probability of business failure.
5. Assessment of the operational efficiency: It helps to assess the operational efficiency and deviation between standards and actual performance.
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Managerial accounting information provides data-driven input, which can improve decision-making over the long term that helps to make their business more successful in business decision contexts.
1. Relevant Cost Analysis: Managerial accounting information is used by company management to determine what should be sold and how to sell it.
2. Activity-based Costing Techniques: By using activity-based costing techniques, management can determine the activities required to produce and service a product line.
3. Make or Buy Analysis: By completing a make or buy analysis, management can determine which choice is more profitable. While this technique is certainly useful, the decision makers should only use these analyses as a factor in the decision.
4. Utilizing the Data: It provides a data-driven look at how to grow. By focusing on this data, decision makers can make decisions that aim for continuous improvement and are justifiable based on intelligent analysis.
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The management accounting function of a bank in conjunction, need to apply competitive bank management skills in order to remain competitive in their industry and maximize profits that may enhance competitiveness to adapting to analyzing bank performance and establishing profitability and risks; managing interest rate risks; managing the cost of funds, bank capital and liquidity; managing credit given to customers and managing the investment portfolio.
Banks are benefited by using the management accounting information to improve towards achieving the organizational goal and objectives; and to control over its expenditure. It is effective in minimizing cost, enhancing profitability, curtails overhead cost and recovers non-performing loans, and beef-up shareholders fund.
Banks can enjoy several advantages that usually coincide with the ability to improve operations and overall profitability. Some are-
1. Reduce expenses: Management accounting can help lower the operational expenses that conduct to analysis on cost of capital.
2. Managing cash flow: It can analyze and measures the effective liquidity requirement as well as careful analysis of necessary and unnecessary cash expenditures.
3. Management decisions: It usually provides a quantitative analysis for various decision opportunities.
4. Increase financial returns: Management accounting increase financial returns by analyzing financial forecasts on cost of capital and pricing of their assets and liabilities.
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The management accounting function of a bank in conjunction, need to apply competitive bank management skills in order to remain competitive in their industry and maximize profits that may enhance competitiveness to adapting to analyzing bank performance and establishing profitability and risks; managing interest rate risks; managing the cost of funds, bank capital and liquidity; managing credit given to customers and managing the investment portfolio.
Banks uses the management accounting information to improve towards achieving the organizational goal and objectives; and to control over its expenditure. It is effective in minimizing cost, enhancing profitability, curtails overhead cost and recovers non-performing loans, and beef-up shareholders fund.
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While breakeven analysis is a useful marketing analytical tool, it does have limitations. This are-
1. Constant Price: The straight line TR curve assumes that every level of output can be sold at the same price. This is unrealistic for the reason that product prices do not remain constant as output hikes. In fact, they change frequently.
2. Constant Cost: It is also assumed that whatever the level of output, AVC remains the same. This suggests that there is no limit to output which the firm can produce. This is again highly unrealistic.
3. Limitless Profits: This analysis assumes that profits are a function of output. This suggests that profits increase without limit as the level of output rises. In fact this never happens for the reason profits are influenced by technological changes, improved management, higher productivity, changes in the scale of fixed factors etc.
4. Ignores Selling Costs: It is based only on production costs and neglects selling costs.
5. Data Limitations: As the BE analysis is based on accounting data, it suffers from such limitations of data as neglect of imputed costs, arbitrary depreciation estimates, inappropriate allocation of overhead costs etc.
6. Limited Products: This analysis is based on a limited range of products and area. The present day firm produces many products and has many departments or plants which cannot be lumped together and presented on a single BE chart. So the scope of this analysis is limited to a single product of a particular business firm.
7. Short run Analysis: The BEA can be used only during the short run. As such it is not an effective tool for the long run.
8. Ignores Elasticity of Demand: It ignores the concept of elasticity of demand and the possibility that different prices may lead to different levels of demand. It also ignores the principle of diminishing returns which every firm has to keep in view for breaking even.
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1. Fair knowledge about break even analysis can help bankers/banking to examine loan proposal of a firm.
2. Break even analysis helps the bankers in assessing working capital requirement of a unit.
3. This analysis helps in revealing clear projections of profit planning of an enterprise at different production level vis-à-vis the financial needs.
4. It also helps to find rate of return on investment of capital at varying levels of production.
5. Break-even lies can be quite useful to management in determining the need for action.
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