What Are the Limitations of Financial Analysis?

Financial status analysis is an accounting element reflecting financial status, and it is also one of the main contents of financial statement analysis. It mainly refers to the evaluation of all aspects of the company's current assets, liabilities, and owner's equity, and analyzes the company's asset structure, debt structure, liquidity, solvency, capital preservation and appreciation capabilities, and cash flow.

Financial analysis

The purpose of financial analysis is mainly to investigate and understand

Correct

(1) Current ratio. How much current debt per yuan

(1)

Generally speaking, there are four main methods of financial analysis:

1. Comparative analysis: to explain

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The main objects of financial analysis and evaluation are the data provided by the financial statements, and the statement data itself is limited, and its specific performance is:

1. Different accounting treatment methods will make the data of similar reports of different enterprises lack comparability, which will lead to differences in financial analysis results. According to the provisions of the current accounting system, the company's inventory issue pricing method, fixed asset depreciation method, bad debt treatment method, foreign investment accounting method, foreign currency statement exchange rate, income tax accounting method, etc. can have different select. For example, there are various methods for pricing inventory delivery, such as first-in-first-out method, last-in-first-out method, weighted average method, and batched actual method. Even if the actual operating conditions of the two companies are completely the same, different methods have different effects on the inventory and cost of sales at the end of the period. Therefore, the relevant data in the financial statements will be different, which will distort the financial analysis of the two companies.

2. Some data in the accounting statements are obtained through estimation, which is greatly affected by the subjective factors of accounting personnel. If the allowance method is used to write off bad debts, the bad debt reserve will be calculated based on the 3% ~ 5% of the balance of the accounts receivable at the end of the year, which will be included in the management expenses: the estimated net residual value rate of fixed assets is 3% ~ 5% If it is lower than 3% or higher than 5%, it shall be decided by the enterprise and submitted to the competent financial authority for the record; the amortization period of intangible assets and start-up expenses, the depreciation period of fixed assets, etc. may result in years or even decades in different enterprises The difference. From a single point of view, these seem to be irrelevant, but each estimate has a direct relationship with corporate profit and loss, and will have an impact on corporate profit and loss, and profit and loss, especially net profit and loss, are often the most concerned in financial analysis.

3. Inflation will seriously distort the data in the balance sheet and income statement. Accounting uses currency measurement as the basic premise, and currency stability is one of the contents of currency measurement assumptions. The reality is that inflation is widespread and the assumption of currency stability is severely challenged. As American inflation accountants put it: "Accounting authenticity depends to a large extent on the authenticity of currency, but currency is a Liar, what it says is different from what it actually means. "

From the balance sheet perspective, due to the existence of inflation, the actual purchasing power of monetary assets is reduced, and the monetary funds listed in the statement are inconsistent with the actual purchasing power it reflects; while physical assets are limited by the historical cost principle, The continuous price increase makes its current value higher than the original book value. The more it is stored for a long period of time, the more serious the undervaluation is; from the perspective of debt, monetary liabilities will bring benefits to the enterprise due to the rise in prices; instead Monetary liabilities will cause losses to the enterprise; at the same time, owners' equity items such as paid-in capital are also reflected in historical cost accounting. Therefore, due to the existence of inflation, it is inevitable that the authenticity of the balance sheet data will be affected, thereby affecting the financial analysis of the enterprise.

Inflation also affects the reliability of the income statement. Due to the impact of accounting recognition and measurement assumptions and principles, such as accrual basis and matching principles, on the one hand, revenue is current, while costs are historical. Under inflation, costs are low due to asset undervaluation. As a result, revenues will increase. In addition, the expenses to be amortized and the deferred assets amortized may be the consumption at the price level in the previous period, the previous periods, or even the previous ten periods, so the net income will inevitably be false.

4, companies often use window decoration technology to deceive users of accounting statements. Generally speaking, among the many indicators of financial analysis, most of them calculated based on the point-in-time indicators can be disguised. For example, companies can relax credit conditions, expand sales, and increase sales revenue before the reporting date for good performance of solvency and operating capabilities; sell short-term securities; handle large capital increases in advance and repay part of current liabilities; reduce or delay purchases at the end of the period and many more.

5. Sometimes the data in financial reports is not comprehensive, that is, there are off-balance sheet factors, which are mainly reflected in:

First, unrecorded contingent liabilities, in accordance with China's "Enterprise Accounting Standards", in addition to discounted commercial acceptance bills as a note reflected in the balance sheet, other contingent liabilities, such as possible quality accident compensation, Decided lawsuits and economic disputes are not reflected in the statements. Once it becomes a de facto liability, if the company loses its lawsuit, its debt burden will inevitably increase.

Second, liabilities arising from guarantee obligations. Enterprises have the right to provide guarantees to other entities with their own assets, and such guarantees are also potential liabilities of the enterprises.

Third, the impact of operating leases. From the current accounting system, the assets of operating leases are not reflected in the balance sheet of the assets. Therefore, to a certain extent, if an enterprise relies heavily on operating leases to carry out production and operations, the total assets are relatively low compared to sales income, Make this type of corporate asset turnover rate overestimated.