1. .

Limitations with Respect to Income statement and Balance sheet dat

1. Comparison of income statement and balance sheet number can create difficulties due to
the timing of the financial statements.
2. Income statement covers the entire fiscal period.
3. The balance sheet applies to a single point in time the end of the period.
4. To cover the entire period we use the average which is not the true representative,
because internal data is not available to the analysts.
5. Computing averages from two similar balance sheet dates can be misleading.
6. It is also possible that a true average cannot be computed from externally published
statement.
7. Applying same set of ratio analysis in one country can be misleading in other country.
8. If ratio is distorted, it does not represent a good absolute number.
9. A care must be taken to use common size analysis because a small change in amount can
result in a very substantial percentage change.
10. Review of descriptive information is very important to understand the financial position
of the firms such as trade periodicals and industry reviews.

Caution in Using Industry Averages

Financial analysis requires judgment decisions on the part of the analyst. Users of financial
statements must be careful not to place complete confidence in ratios or comparisons

Calculation of Averages

1. Theoretically, the best average would be based on month-end figures, which are not
available to the outside users.
2. Computing an average based on beginning and ending figures provides a rough
approximation that does not consider the timing of interim changes in assets. Such
changes might be related to seasonal factors.
 3. Annual report only contains two balance sheets, obtaining the data for averages may be a
problem. So the ending balance sheet figure may be used consistently instead of averages
for ratio analysis.
4. Similar comments could be made about the ratios that utilize balance sheet figures.

Institutions Provides Financial Statement Analysis

1. Standard and poor industry survey.

2. Karachi stock exchange, Balance sheet analysis.
3. The Almanac of business and industrial financial ratios by Leo Troy (Prentice Hall).
4. Industry Norms and key business ratios desktop edition published by Dun & Bradstreet
includes 800 different lines of business defined by U.S Standard Industrial Classification
(SIC).
5. Value Line Investment Services contains profitability and investment data for 1700 firms.