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2.2.4 Limitation of Financial Statement Analysis
The
financial
statement
analysis
techniques are
useful
for
providing
insights
into
the
financial position and performance. Nevertheless, there are certain
limitations that
should consider.
According to Hogget,
Edwards, and Medlin (2003, p.1024-1025) those
limitations include:
1.
Financial
analysis performed
on
historical
data
mainly
to forecasting future
performance. The historical relationships may not continue because of changes in
the general state of the economy, the business
environment
in
which
the
entity
must operate, or
internal
factors such as change
in
management or changes
in the
policies established by management.
2. The
measurement
base
used
in
calculating
the
analytical
measures
is
historical
cost.
Failure to
adjust
for
inflation
or
changes
in fair
values
may
result
in
some
ratios providing misleading information on a trend basis and in any comparison
between entities.
3. Year-end data
may
not be typical of
the entity’s position
for
the
year. Knowing
that certain ratios calculated at year-end, management may attempt to improve a
ratio by entering certain types of transactions near the end of the year.
4.
Sometimes
the
information
contained
in
the
general-purposed
reports
may
be
subject to modifications, supplementations and qualifications expressed in
accompanying documents such as directors’ reports and auditors’ report. Any
analysis and interpretation should take into consideration such matters.
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