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State Any Two Limitations of Financial Statement Analysis

State any two limitations of financial statement analysis

Explanation

1. Historical Costs: Financial reports depend on historical costs. All the transactions are recorded at historical costs. The value of the assets purchased by the Company and the liabilities it owes change with time and depends on market factors. The financial statements do not provide the current value of such assets and liabilities. Thus, if a large number of items available in the financial statements are based on historical costs and the Company has not revalued them, the statements can be misleading.

2. Inflation Adjustments: The assets and liabilities of the Company are not inflation-adjusted. If the inflation is very high the items in the reports will be recorded at lower costs and hence, not giving much information to the readers.