What are limitations of financial statement analysis?
Limitations of financial statement analysis:
1. Not a Substitute of Judgement An analysis of financial statement cannot take place of sound judgement. It is only a means to reach conclusions. Ultimately, the judgements are taken by an interested party or analyst on his/ her intelligence and skill.
2. Based on Past Data Only past data of accounting information is included in the financial statements, which are analyzed. The future cannot be just like past. Hence, the analysis of financial statements cannot provide a basis for future estimation, forecasting, budgeting and planning.
3. Problem in Comparability The size of business concern is varying according to the volume of transactions. Hence, the figures of different financial statements lose the characteristic of comparability.
4. Reliability of Figures Sometimes, the contents of the financial statements are manipulated by window dressing. If so, the analysis of financial statements results in misleading or meaningless.
How will you disclose the following items in the Balance Sheet of a company;
(i) Loose tools
(ii) Uncalled liability on partly paid-up shares
(iii) Debentures redemption reserve
(iv) Mastheads and publishing titles (v) 10% debentures
(vi) Proposed dividend
(vii) Share forfeited account
(viii) Capital redemtion reserve
(ix) Mining rights
(x) Work-in-progress
The current ratio provides a better measure of overall liquidity only when a
firm’s inventory cannot easily be converted into cash. If inventory is liquid, the
quick ratio is a preferred measure of overall liquidity. Explain.
Explain the usefulness of trend percentages in interpretation of financial performance of a company.
The liquidity of a business firm is measured by its ability to satisfy itslong-
term obligations as they become due. What are the ratios used forthis purpose?
What relationships will be established to study?
(a) Inventory Turnover (b) Debtor Turnover
(c) Payables Turnover (d) Working Capital Turnover
What do you understand by analysis and interpretation of financial statements? Discuss its importance.
State the importance of financial statements to
(i) shareholders
(ii) creditors
(iii) government
(iv) investors
What are liquidity ratios? Discuss the importance of current and liquid ratio.
What is the importance of comparative statements? Illustrate youranswer with particular reference to comparative income statement.
What do you mean by Ratio Analysis?
Explain how common size statements are prepared giving an example.
Prepare the format of balance sheet and explain the various elements of balance sheet.
Explain how financial statements are useful to the various parties who are interested in the affairs of an undertaking?
Describe the different techniques of financial analysis and explain the limitations of financial analysis.
How would you study the Solvency position of the firm?
Explain in detail about the significance of the financial statements.
What relationships will be established to study?
(a) Inventory Turnover (b) Debtor Turnover
(c) Payables Turnover (d) Working Capital Turnover
List any three objectives of analysing financial statements?
Explain the process of preparing income statement and balance sheet.
What are various types of ratios?