state advantages and limitation of analysis of financial statement ?

Advantages of Financial Analysis

The following are the advantages of the Financial analysis.

1. It enables the conduct of meaningful comparisons of financial data. It provides better and easy understanding of the changes in the financial data overtime.
2. It helps in designing effective plans and better execution of plans by enabling control and checks over the use of the financial resources.
3. Analysis of Financial Statements helps to know the earning capacity and profitability of a business firm. It also measures the efficiency of the business operations.
4. It also helps in assessing the solvency position of the firm. This implies that by studying the analysis of financial statements the ability of a firm to discharge its short-term as well as long-term obligations (debts).
5. It enables the intra-firm as well as inter-firm comparison.

Limitations of Financial Analysis

The following points explain the various shortcomings of the financial analysis.

1. Ignores Changes in the Price level- The financial analysis fails to capture the change in price level. The figures of different years are taken on nominal values and not in real terms (i.e. not taking price change into considerations).
2. Misleading and Wrong Information- The financial analysis fails to reveal the change in the accounting procedures and practices. Consequently they may provide wrong and misleading information.
3. Interim and Final Picture- The financial analysis presents only the interim report and thereby provides incomplete information. They fail to provide the final and holistic picture.
4. Ignores Qualitative and Non-monetary Aspects- The financial analysis reveals only the monetary aspects. In other words, these analyses consider only that information that can be expressed only in monetary terms. These analyses fail to disclose managerial efficiency, growth prospects, and other non-operational efficiency of a business.
5. Accounting Concepts and Conventions- The financial analysis are based an accounting concepts and conventions. Therefore, the analysis and conclusions based on such analyses may not be reliable. For example, the analysis considers only the book-value of various items (i.e. according to the Going Concept) and consequently ignores the present market value of those items. Hence, the analysis may not be realistic.