Limitations of Financial Analysis

• What can't financial statements predict?

  New toys that will come out
• What is the analogy used to describe comparing financial statements?

  Comparing an ant to an elephant
• What do financial statements tell you about your past?

  What you played with and how much fun
• How does human judgment complement financial statement analysis?

  Uses data to make decisions
• Does past data guarantee future results in financial analysis?

  No, it does not guarantee the same results
• What is the comparability of figures for a small local store?

  Low
• How do financial statement analysis and human judgment work together?

  • Financial analysis provides the map and data
  • Human judgment acts as the driver
  • Together, they help make informed decisions
• What does the comparison of an ant and an elephant illustrate about businesses?

  Businesses of different sizes are hard to compare
• What does "window dressing" refer to in financial figures?

  Manipulation of data to mislead
• Why is it hard to compare an ant and an elephant?

  They are different sizes and do different jobs
• How does financial statement analysis differ from a magic answer?

  It requires critical thinking and personal judgment
• What is the comparability of figures for a large retail chain?

  Low
• Why is comparing financial statements often difficult?

  Because businesses vary in size and transaction volume
• Why is it important to understand different accounting and financing methods?

  They help analyze statements accurately
• What is a limitation of looking at old financial statements?

  They don't predict the future
• How does the volume of transactions differ between a large retail chain and a small local store?

  A large retail chain has high volume, small store low
• What metaphor is used to describe the inability of financial statements to predict the future?

  They are not like a magic ball
• What are the key limitations of using past financial statements?

  • Cannot predict new toys
  • Cannot foresee new games
  • Cannot determine friends' preferences
• What does an increase in the price of a movie ticket indicate about purchasing power?

  It indicates lower purchasing power
• Why can't financial statements tell you about future games?

  They only reflect past activities
• What economic phenomenon causes money to buy less over time?

  Inflation
• Why is it important to check if financial numbers are true?

  To ensure the analysis is correct
• What are the accounting methods mentioned in the study material?

  • FIFO (First In, First Out)
  • LIFO (Last In, First Out)
  • Straight-line depreciation
  • Accelerated depreciation
• How can a broken toy car represent misleading financial statements?

  • The toy car looks new after being glued and painted
  • It still remains broken underneath
  • Similarly, misleading numbers may appear accurate but are not
• What does it mean when financial numbers are not real?

  They may be manipulated or misleading
• What does money buy today compared to a few years ago?

  Less
• What can result from using the wrong tool in financial statement analysis?

  Misleading results
• What factors can change future performance despite past success?

  Study habits, course difficulty, personal circumstances
• What does human judgment rely on?

  Experience and wisdom
• What are some limitations of the treasure map analogy?

  It can't tell you everything or foresee new obstacles
• What is a metaphor used to describe tools for analysis?

  A toolbox with different tools
• How does the analyst's skill affect the choice of tools for financial analysis?

  It determines which tools will yield accurate results
• What is not good for companies regarding accounting methods?

  Changing how they do their accounting
• What is the impact of choosing between equity and debt financing?

  It changes the capital structure of a business
• Why are business conditions of one year different from another?

  Because conditions and circumstances change over time
• What does managerial ability focus on?

  Quality of leadership and decision-making
• What insights does managerial ability provide?

  Strategies, innovation, and team management
• Why might a company show high profits but indicate poor management?

  Due to inefficient processes or poor morale
• In the analogy provided, what does the map represent?

  Financial analysis data
• Why is it important to use the right tool for financial analysis?

  To understand the numbers accurately