Task Team of FUNDAMENTAL ACCOUNTING School of Business Sun Yat-sen University using analytical tools to evaluate a company, the analyst should keep in mind the limitations of alysis, for example Not all information about a company is reported in the financial statements. For example, the effect of a change in the future market price of the firms product, future technological change, the strength of marketing or production staff, the effect of ge nt action. and union activities are not likely to be reflected in the numbers. The analyst must obtain information about such factors from other sources, such as the financial pres Ratios and other measurements are based on past performance, reported on the historical cost basis. If the current value of a firms assets is significantly different from historical costs, or if intangible assets are significant, ratio analysis may not yield a fair assessment of the companys performance or condition Even within the same industry, different companies may use different accounting policies For example, inventory valuation may be based on LIFO, FIFO, or average cost, and amortization may be calculated using the straight-line method or an accelerated method. The analyst should ead the notes to the financial statements to determine a companys accounting policies and then adjust for any differences in accounting policy before attempting to compare results with other firms in the same industry The past may not predict the future Although ratio analysis suffers from the limitations of accounting information, a careful and sensible analyst should be able to obtain a clear picture of the company's operations and provide useful information to investors and creditor Summary Users of financial statements often gain a clearer picture of the economic condition of an entity by the analysis of accounting information The analytical measures obtained from financial statements are usually expressed as ratios or percenta Financial analysis techniques work best when they are used to confirm or refute other information. When using analytical tools to evaluate a company, the analyst should keep in mind the limitations of analysis 1. Ratio analysis of financial information 2. Limitations of financial statement analysiTask Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University using analytical tools to evaluate a company, the analyst should keep in mind the limitations of analysis, for example: Not all information about a company is reported in the financial statements. For example, the effect of a change in the future market price of the firm’s product, future technological change, the strength of marketing or production staff, the effect of government action, and union activities are not likely to be reflected in the numbers. The analyst must obtain information about such factors from other sources, such as the financial press. Ratios and other measurements are based on past performance, reported on the historical cost basis. If the current value of a firm’s assets is significantly different from historical costs, or if intangible assets are significant, ratio analysis may not yield a fair assessment of the company’s performance or condition. Even within the same industry, different companies may use different accounting policies. For example, inventory valuation may be based on LIFO, FIFO, or average cost, and amortization may be calculated using the straight-line method or an accelerated method. The analyst should read the notes to the financial statements to determine a company’s accounting policies and then adjust for any differences in accounting policy before attempting to compare results with other firms in the same industry. The past may not predict the future. Although ratio analysis suffers from the limitations of accounting information, a careful and sensible analyst should be able to obtain a clear picture of the company’s operations and provide useful information to investors and creditors. Summary Users of financial statements often gain a clearer picture of the economic condition of an entity by the analysis of accounting information. The analytical measures obtained from financial statements are usually expressed as ratios or percentages. Financial analysis techniques work best when they are used to confirm or refute other information. When using analytical tools to evaluate a company, the analyst should keep in mind the limitations of analysis. Key points 1. Ratio analysis of financial information. 2. Limitations of financial statement analysis