State the limitations of analysis of financial statements. [4]

Ans. Limitations of Financial Statement Analysis are
(i) Historical information: The information supplied by financial statement are historical one, because it is prepared on the basis of historical cost and book values of assets. It never considers the changes in price level.

(ii) Incomplete Information:  The financial statements are just study of interim reports. It is totally based on accounting principles, concepts and conventions, i.e. Assets shown in balance sheet are on the basis of going concerns but they may not realise the stated values, profit and loss of concerns, based on conventions of conservation hence it fails to represent exact profit and loss i.e. Depreciation, provision for bad & doubtful debts are based on estimates.
(iii) Qualitative Information is ignored:   In financial statements only monetary aspects are measured. Non-monetary aspect such as harmony, efficiency of management, completion etc. are ignores. Actually it is important for achievement of business.
(iv) It is only the tool but not the remedy:  Analysis of financial statement is the tool to measure the solvency, profitability, financial strength etc. It does not give any solution to overcome the drawbacks of business.

(v) Influence of personal judgement: The financial statements and its conclusions are derived by personal decisions, such as method of depreciation, Inventory valuation, writing off of deferred expenses, etc. So its reliability depends upon the experience, ability & honesty of accountant.