Question

1. What are the objectives of financial statement anaysis? Answer in 100-150 words

2. Discuss the limitations of financial statement analysis?Answer in 100-150 words

Answer 1

Objectives of financial statement anaysis

The main objective of financial statement analysis is to provide information about the financial position, performance and changes in financial position of a company that is useful to a wide range of users in making economic decisions. By examining the past and current financial data, investors can evaluate a company’s performance and financial position as well as assessing risks. Financial statement analysis yields valuable information about trends and relationships, the quality of a company's earnings, and the strengths and weaknesses of its financial position.

a) Assessment of Past Performance

Past performance is a good indicator of future performance.

b) Assessment of current position

Analysis of the current position indicates where the business stands today.

c) Assessment of the operational efficiency

Financial statement analysis helps to assess the operational efficiency of the management of a company.

Limitations of financial statement analysis

1. Only Interim Reports:

These statements do not give a final picture of the concern. The data given in these statements is only approximate. The actual position can only be determined when the business is sold or liquidated. However, the statements have to be prepared for different accounting periods,

2. Historical Costs:

The financial statements are prepared on the basis of historical costs or original costs. The value of assets decreases with the passage of time current price changes are not taken into account.

3. Impact of Non-Monetary Factors Ignored:

There are certain factors which have a bearing on the financial position and operating results of the business but they do not become a part of these statements because they cannot be measured in monetary terms.

4. No Precision:

The precision of financial statement data is not possible because the statements deal with matters which cannot be precisely stated.