Limitations of Analysis and Interpretation of Financial Statements


Limitations of Analysis and Interpretation of Financial Statements

A) Non Availability of Data
When dealing with private companies it can be quite difficult to obtain data and financial statements from firms of interest to an analyst. Even in public companies there may be limited financial disclosures which could result in non-availability of data.

B) Absence of Qualitative Data and Information
Accounting figures do not fully encompass qualitative attributes of a firm. These may be important in interpretation of financial statements, absence of which may distort the analysis.

C) Non-Uniformity in Reporting Periods
When entities report results in different time periods, comparison of results is also limited.

D) Non-Uniformity in Accounting Estimates and Policies
Firms can choose different accounting methods and still remain within Standard Accounting Practice. Differences in accounting estimates can result in incomparability of results of firms.

e) Inflation
Conventional financial statements do not take account of inflation. Therefore, in time series analysis the effects of inflation on financial statements under observation need to be taken account of.

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