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Analysis of financial performance and position

Limitations of financial statement

analysis

3.1 Limitations of financial reporting information

 Only provides historic data.

 Only provides financial information.

 Filed at least 3 months after reporting date so reducing relevance.

 Limited information for trend analysis over time.

 Lack of detailed information (aggregation).

3.2 Limitations of comparing different entities

 Different accounting policies used between entities.

 Different accounting practices between entities.

 Non-coterminous accounting periods.

 Entities in same industry can have different market sectors.

 Incomparability due to size.

 Different regulatory systems in different countries.

3.3 Limitations of ratio analysis

 Acceptable variants of certain ratios exist (Gearing, ROCE).

 Distortion of results e.g. seasonality.

 Absence of additional information to establish a conclusion.

 Can be affected by creative accounting/fraudulent financial reporting (profit
smoothing, off-balance sheet finance, teeming and lading).

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