Accountancy Part BAnalysis of Financial Statements

Which of the following is not a limitation of financial analysis?

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → Financial analysis discloses the tax irregularities.

Financial analysis studies the figures in the financial statements, so it shares their weaknesses.

Option (1) Financial analysis does not consider price level changes. — A limitation of financial analysis. Figures of different years are compared at different money values.
Option (2) Non-monetary aspects are ignored in financial analysis. — A limitation of financial analysis. Matters such as the quality of management or the skill of the workers are left out.
Option (4) Financial analysis may be misleading without knowledge of the changes in accounting procedure. — A limitation of financial analysis. A change of method can change the figures, so a comparison across years can mislead.

Disclosing tax irregularities is not a limitation of financial analysis, so Option (3) is the statement that does not belong to the list.

NCERT (2026-27 edition):
Limitations of Financial Analysis – “… Some other limitations of financial analysis are: Financial analysis does not consider price level changes. Financial analysis may be misleading without the knowledge of the changes in accounting procedure followed by a firm. Financial analysis is just a study of reports of the company. Monetary information alone is considered in financial analysis while non-monetary aspects are ignored. The financial statements are prepared on the basis of accounting concept, as such, it does not reflect the current position.”