Question

Which of the following indicate limitation of financial analysis:

• A. They focus on the facts and relationships related to managerial performance, corporate efficiency etc.
• B. They does not consider price level changes.
• C. They indicate the ability of the company to meet its obligations.
• D. They provide vital information to different stakeholders.

Hint:

Always remember: A key limitation of financial analysis is that it is based on historical cost accounting and ignores inflationary effects.

Answer 1

The Correct Option is B

Step 1: Understanding financial analysis.
Financial analysis is a process of interpreting financial statements to assess performance, liquidity, profitability, and solvency of a business. It provides information to management, investors, creditors, and other stakeholders.

Step 2: Identifying limitations.
While financial analysis is useful, it suffers from some limitations, such as: - It is based on historical data, which may not reflect present conditions. - It ignores qualitative aspects like employee skills or goodwill. - Most importantly, it does not account for changes in price levels (inflation or deflation).

Step 3: Analyzing the options.
- Option 1: They focus on facts and relationships related to managerial performance. → This is a strength, not a limitation.
- Option 2: They does not consider price level changes. → This is indeed a limitation.
- Option 3: They indicate ability of company to meet obligations. → This is a strength.
- Option 4: They provide vital information to stakeholders. → This is also a strength.

Step 4: Conclusion.
The only correct limitation here is option 2.

Final Answer: \[ \boxed{\text{They does not consider price level changes.}} \]