Q.State any four limitations of Analysis of Financial Statements.

Analysis is a powerful tool, but it works only with the past, money-measurable figures it is given — it has real, well-known limits.

Even though ratio and statement analysis is one of the most useful tools available to a reader of accounts, it has genuine, well-recognised limitations:

1. Historical, not predictive — the figures analysed relate to the PAST; a good past ratio is not a guarantee the same result will repeat in the future, since business conditions can change.
2. Ignores qualitative factors — analysis works only with figures that can be expressed in money; it cannot directly capture staff morale, brand reputation, customer loyalty, or the quality of management.
3. Affected by accounting policies — two firms using different methods of depreciation or stock valuation (e.g., Straight Line vs Written Down Value, or FIFO vs Weighted Average) are not strictly comparable, even when their published ratios look similar.
4. Ignores price-level (inflation) changes — figures from different years are compared at their face rupee value, without adjusting for a fall in the purchasing power of money over time, which can make a genuine improvement look larger (or smaller) than it really is. …

Students sometimes state 'ratios can be manipulated' as a vague, unexplained limitation without linking it to WHY — it is the underlying accounting policy choices (depreciation method, stock valuation method, window-dressing of figu …