Question

Discuss some of the limitations associated with performing ratio (financial statement) analysis. What is the most important ingredient in put in completing ratio analysis? Explain why

Answer 1

Sokition:= Fion the given data, we have. Some of the limitations asociated with poormind satio ondlysis aste as follows : > hange Cagbracnatie having dibmat busiauss mayh- ave Consolidhateel fnancial slatment, The financial Sio Calcaktid fnom such financial statmint coenit be Com paned aith ratio of Companies which have focuse d busincs aneas. Thore fore ,guch Companispas and ana- not offer worthwhile thights. lysis may any The balanee sheit information is based on histanical- Valus and the income statmint will have figores fon the Curunt accounting poriod, Aotios suchas deturn cvuity. when Compaud bitwun the two Companie- s may have to fake not of the fime Value of money. In other wonds, cuithout Comecting Bn ioflation, the Com- parisons may not prove sueful. Many industres have a pronouud Seasonal vaniedion in Opera hions. To illustrate , a sugar factory producing Cane in Tndia may oporate for only about 100 to 800 Sugar day's in a yeor because Sugan Cane which is a Cnop is hanvestid Vasting poriods depead on the agno-climatie Concditions Once in a year, The growth and har- in a panticular location. Thorfone, the yevenu- prevaling 'es and sxpindihere sia tions. The financial ratios Calculateid at diffount peri ods cwill abo show lazge vania tions. show Corsidaable monthly may Va - D Despit arll laid out auounting standands, Companin ies , have some ftexbility ia pnesen ting financialstet

cMents. Vaniokis items in the financial staments bacudon Subjective assissment of the Managemint To Jlustnate lugtion "fixst ie fisst out" on last in finst out". Some Companies may classidy auounts payable if they older than go es may not. such subjective policies Companisons. Some Companies sMay intntionally Cook up" the financial statmunts so that the Companies ane shown in favosable light to iavestons and other stoke holdors. Thatio analysis of Such financial statments Counte'n pnoduc five . Offen a Single satio abne may be înadeauate fo draw any meaningtal Conclusion - Muttiple finanialoati. os and that foo ovor a revained fo mahe be May some Companies May follow fon inverntory va- chys as bad dibt. some othor Compani- distont. may be may period of time would be any wonth while Sense. * pleasa vate *