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ACCA Applied Knowledge · Financial Accounting · Importance and purpose of analysis of financial statements

Which of the following is a limitation of using historical financial statements to analyse a company's performance?

Historical financial statements record past transactions, so ratios based on them describe what has already happened. Conditions, strategy and market circumstances can change, meaning past results may not predict future performance. This is a core limitation of financial statement analysis.

  1. AThey reflect past transactions and may not indicate future performanceCorrect
  2. BThey are always prepared using different accounting standards in each year
  3. CThey exclude all monetary items from the statement of financial position
  4. DThey are unaffected by accounting policy choices

Explanation

Financial statements report events that have already happened, so ratios derived from them describe the past and may not predict the future. The other options are untrue: standards are applied consistently, monetary items are included, and policy choices do affect reported figures.

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