5 Limitations of Financial Analysis

Financial analysis is comprehensively beneficial in ascertaining financial weaknesses and strengths of an enterprise, it is grounded on the data that is obtainable in financial statements. The financial analysis also goes through several limitations of financial statements. Therefore, the analyst must be aware of the effect of the cost price level changes, changes in accounting policies of an enterprise, window dressing of financial statements, personal judgement, accounting concepts and conventions, etc., The following are the limitations of financial statements – dependence on historical costs. Transactions are normally documented at their cost price. This is a primary concern when analysing the balance sheet, where the values of assets and liabilities might differ over time. Some other limitations of financial analysis are mentioned below :

  • The financial analysis does not contemplate cost price level changes
  • The financial analysis might be ambiguous without the prior knowledge of the changes in accounting procedure followed by an enterprise
  • Financial analysis is a study of reports of the enterprise
  • Monetary data alone is contemplated in financial analysis while non-monetary factors are overlooked
  • The financial statements are outlined on the ground of accounting concept, as such, it does not mirror the current position

The above mentioned is the concept, that is elucidated in detail about the Limitations of Financial Analysis for the class 12 Commerce students. To know more, stay tuned to BYJU’S.