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1.	State any two limitations of Financial Statement Analysis.
Answer» 1 – Historical Costs :Financial reports depend on historical costs. All the transactions are recorded at historical costs. The value of the assets purchased by the Company and the liabilities it owes changes with time and depends on market factors. The financial statements do not provide the current value of such assets and liabilities. Thus, if a large number of items available in the financial statements are based on historical costs and the Company has not revalued them, the statements can be misleading. 2 – Inflation Adjustments :The assets and liabilities of the Company are not inflation adjusted. If the inflation is very high the items in the reports will be recorded at lower costs and hence, not giving much information to the readers.

2.	What is meant by Financial Statement Analysis? State any two limitations of it.
Answer» (i) Manipulation or Window Dressing : Some business enterprises resort to manipulate the information contained in the financial statements so as to cover up their bad or weak financial position. Thus, the analysis based on such financial statements may be misleading due to window dressing. 2) Use of Diverse Procedures : There may be more than one way of treating a particular item and when two different business enterprises adopt different accounting policies, it becomes very difficult to make a comparison between such enterprises. For example, depreciation can be charged under straight line method or written down value method. However, results provided by comparing the financial statements of such business enterprises would be misleading.

3.	What is meant by Analysis of Financial Statements? How is iot useful for (a) Creditors, (b) Management, (c) Investors, (d) Employess, (e) Government , and (f) Customers ?
Answer» a) Creditors: They are the suppliers of the raw materials and other necessary items on credit to the company. They are interested to know the liquidity position of the company. b) Management : The management or manager has started to show keen interest in knowing the contents of financial statements which are used for internal management and control. Financial statements help the management in its various functions of planning, control, coordination and motivation. c) Investors: Prospective investors who are going to buy the shares of the company in the very future. Hence, they are interested to know future prospects and financial strength of the company. d) Employees: The regular payment of wages and salaries are based on the financial position of the company. Hence, they are interested to know financial position of the company. e) Government Departments : Department of company affairs and other government departments are dealing with the industry in which the company is engaged are interested in the financial information relating to the company. f) Customers : Some customers are loyal to the company since they are buying the products for a long period continuously. Hence, they are interested to verify the financial strength of the company.

4.	Why are investors intersted in analysing Financial Statements?
Answer» All publicly traded companies and large private entities prepare financial statements periodically. The purpose of creating financial statements is to capture a company’s financial position for a given period. This allows users of financial information to analyze and compare the health of one company to another. Financial statements provide assessment of a company’s profitability, liquidity and operational efficiency.

5.	How is the Finanical Statement Analysis useful to Financial Manager?
Answer» The management or manager has started to show keen interest in knowing the contents of financial statements which are used for internal management and control. Financial statements help the management in its various functions of planning, control, coordination and motivation.

6.	Discuss the advantages of Finanical Statement Analysis.
Answer» 1) This statement is useful to the management as guidance, as it explains always the funds movement in the organisation. 2) Company managers can compare sources with other sources and ascertain the results. If the style of change is not observed, it may lead to financial problems. 3) If the company depends on external sources for additional funds, it becomes burden on capital structure; working capital of the organisation can be increased by reducing other liquid assets. 4) The funds flow statement shows ways for this purpose. It is useful to the management as a good tool to understand the funds movement in the organisation very easily. 5) It is useful to forecast funds flow. It can also be used to know the working capital requirements. It provides reasonable time to ascertain future funds requirements and make suitable arrangements to get the same.

7.	What is meant by Analysis of Financial Statements ? How is it useful to investors and employees ? Explains in brief.
Answer» 1) Investors : Investors will likely require financial statements to be provided, since they are the owners of the business, and want to understand the performance of their investment. 2) Employees : A company may elect to provide its financial statements to employees, along with a detailed explanation of what the documents contain. This can be used to increase the level of employee involvement in and understanding of the business.

8.	What is Cross- sectional Analysis?
Answer» Cross-sectional analysis is a type of analysis where an investor, analyst or portfolio manager compares a particular company to its industry peers. Cross-sectional analysis may focus on a single company for head-to-head analysis with its biggest competitors or it may approach it from an industry-wide lens to identify companies with a particular strength.

9.	What is a Time Series Analysis?
Answer» Time series analysis is a statistical technique to analyze the pattern of data points taken over time to forecast the future. The major components or pattern that are analyzed through time series are: Trend, Seasonality, Cyclicity , Irregularity.

10.	Why is an inter-firm comparison useful?
Answer» The published trading and profit and loss accounts and the balance sheets along-with the annual reports provide scanty data for purposeful study and assessment of the performance of a company. The figures available from these reports just indicate, in a general way, the profitability, stability, solvency and growth of an organisation, but they do not throw light on whether a company has really made the optimum use of all the available resources in men, materials etc. However, depends fully on the availability of more detailed data, and the possibility of comparison with the competitive units in the same line of manufacture. It is the inter-firm comparison that provides the management with a vivid comparative picture of how its operating performance, financial results, and product cost structure compare with those of other firms of similar size, nature, industry or trade.

11.	Is financial analysis helpful in assessing the financial position of a concern?
Answer» Financial analysis is helpful in assessing the financial position and profitability of a conern.

12.	State the interest of management in the Analysis of Financial Statements.
Answer» The management or manager has started to show keen interest in knowing the contents of financial statements which are used for internal management and control. Financial statements help the management in its various functions of planning, control, coordination and motivation.