Limitation of Analysis 2 Essay Example

Topic: Limitation of Analysis

Lecturer:

The comparison of the two companies gives a hint of the company’s financial health. Although this analysis is valuable, there are some difficulties in making a decision based on the financial statements. This arises through the uses of different accounting methods in valuing the aspects in financial data[ CITATION Raj11 l 1033 ]. In cases where the companies values it stock using the different valuation methods such as Weighted Average method, LIFO, FIFO and simple average method the inventory valuation and the cost of goods sold (COGS) of the two firms will be misleading. Also, other company’s financial statements will add additional representation of data in the foot notes to enable restatement of the financial data; thus the analyst then do lack the comparable basis. Origins Limited reflected a decrease of cash and cash equivalent and this decline was interpreted in the footnotes as this was a result of the company spending on acquisition of property plan and equipment. Therefore, the element of comparing the AGL and Origin limited would give a better view of the firm financial health.

The conclusion based on the ratio analysis should be considered tentative. Ratios then to present a general simplistic view of the firm’s information’s by distilling the data into a series of numbers that may not give the adequate comparability over time[ CITATION Ste08 l 1033 ]. Financial ratios should not be considered the basis of forming the opinion on the companies’ performances, but it should be viewed as the key point to perform in-depth more investigation to form an analysis. Ratios should be used as a tool of disquieting for in-depth viable analysis such as study of changes in consumer preference, changes in the economic factors surrounding the company and the general changes within the firm itself. The liquidity ratios, Assets efficiency ratios should not be used to as a base of giving viable analysis.

Accounting policies may be followed by companies to the later. These policies can be adjusted by deferent companies to aid their preparation of accounting statements. Analysis based on AGL and Origins limited is subject to deformities brought by different accounting policies applied in their preparation[ CITATION Rob09 l 1033 ]. I.e. Origins limited financial statements are based on the historical judgments which will limit the finding from their analysis.

Reference List

McLean, R. A. (2009). Financial Management in Health Care Organizations. Cengage Learning.

Steven R. Jackson, R. B. (2008). Managerial Accounting: A Focus on Ethical Decision Making. Cengage Learning.

Mercer V. (2011). Financial Accounting. India: Pearson Education.