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

Which of the following is a recognised weakness of using historical financial statements as the sole basis for analysing a company?

Historical financial statements describe past events, so ratios based on them are backward-looking and may not indicate future performance. Analysts should therefore supplement them with forecasts, industry information and non-financial data when assessing a company.

  1. AThey are not prepared using consistent accounting standards in any jurisdiction
  2. BThey reflect past events and may not indicate future performanceCorrect
  3. CThey exclude the statement of financial position
  4. DThey contain only non-financial information

Explanation

Financial statements report past transactions at a point in time or for a past period, so ratios derived from them are backward-looking and may not predict future performance. The other options are factually incorrect.

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