The paper "Liquidity, Profitability and Financial Stability of Jitterbug Pty Ltd " is an outstanding example of a finance and accounting assignment. Shortcomings of financial statements- most of the analysis is done by analyzing the information in the financial statements. If this information has any limitations, then the analysis will have the same limitations and will not reflect the true status of the business, moreover, personal judgments could be used in preparing the financial statements, meaning the analysis will also be subjective. 11 ii. The analysis is based on analyzing the past performance of the company and using them to project the future.
However, this projection may not be accurate since the future of the business can be affected by so many factors like changes in market conditions and management. 11 iii. Changes in price levels- price changes take place from period to period. Prices are changing at a very high rate and the price level prevailing today may be very different this may affect the validity of the ratios used. When this happens, it becomes difficult to clearly predict the trend in profitability and financial stability of the company.
The only option would be adjusting the price levels of the different period so that the analysis can reveal accurate comparisons. 11 iv. Lack of standards- there are no standards or rules to determine the ideal ratios. Different companies use different ratios to measure profitability, liquidity and financial stability. In such a case, it becomes difficult to interpret the ratios. 11 v. Several ratios required to make judgments- a single ratio cannot be adequate to make decisions about the performance of the company, therefore, it is important that several ratios be used to enable one to make decisions.
When the ratios become so many, they may confuse the analyst, instead of assisting them to make the correct decision. 11 vi. Problem of comparisons- firms operate in different industries and the same ratios cannot be used to compare all companies. Moreover, even firms in the same industry differ in size, structures and accounting procedures; therefore, it becomes hard to compare even firms in the same industry. Different firms can as well manipulate their operations and accounting information to portray a good performance, which may not be true.
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Accounting for management, 2011. Accounting Ratios, Financial Ratios: retrieved from http://www.accountingformanagement.com/financial_statement_analysis_accounting_ratios.htm on 11th may 2011