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Financial Analysis

What are some potential problems and limitations to financial analysis? What are some qualitative factors analysts should consider when evaluating a company's likely future financial performance.

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Cunningham (2006) stated that assets and liabilities should be quantified in units of money. She stated that, "if a number is not on the financial statements, it is not reliable" (Cunningham, p. 6). Financial Accounting Standards Board (FASB) (2008) discussed the representational faithfulness of balance sheet and how it "purports to represent". FASB touched the fact that goodwill is not included in the financial statement even though it is one of company's assets. This is a potential problem and limitation to financial analysis since it creates confusion to the exact amount of a company's assets as most information are estimated and not exact.

As a financial manager, when there is a cost that seems like an "unfair" allocation of costs, such that managers not responsible for those general cost of the production, I would suggest that it is unnecessary for the corporate costs to be allocated "because a positive contribution by divisions will cover at least some of those ...

Solution Summary

This solution provides a comprehensive analysis of limitations to financial analysis. It also includes many important qualitative factors that should be considered when evaluating a company's likely future financial performance. This solution will strengthen one's knowledge of financial analysis. A list of 6 references is also included.