Disadvantages Of Financial Statement Analysis

Accounting , Business
Notable limitations or disadvantages of financial statement analysis can be expressed as follows:

1. Ignores Qualitative Aspect

Financial statement analysis checks only quantitative or monetary aspect of the business. It totally ignores qualitative aspect.

2. Historical Data

Financial statement analysis is done with the help of historical financial data provided by financial statements. So, it may not be a base or indicator for future estimation, planning, forecasting and decision making.

3. Biasness

Financial statement analysis may suffer from the biasness of the analysts. This may mislead the users.

4. Does Not Provide Solution

Financial statement analysis only identifies the finance related problems of the company. It fails to suggest the solutions.


Different companies may follow different accounting principles (like different depreciation methods, LIFO method, FIFO method etc). In this situation it is impossible to compare different financial statement accurately. 

6. Price Level Change

Effect of price level change cannot be adjusted in financial statement analysis.
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Advantages Of Financial Statement Analysis

Accounting , Business
Main benefits or advantages of financial statement analysis can be studied as follows:

1. Evaluation Of Past Performance

Financial statement analysis evaluates the past performance of business such as sales, cash flows, income, return on investment etc. by using different techniques like trend analysis, vertical analysis, ratio analysis etc.

2. Indication Of Current Position

Financial statement analysis indicates the current financial position of the business in terms of profitability and operational efficiency.

3. Prediction Of Future Performance

Financial analysis provides the data of past and current financial position of the business. These data and information are the bases to predict future earnings and growth rate of the business.


4. Planning And Decision Making

Financial statement analysis evaluates and compares the past and present performance of the business. It helps the management in planning and decision making process.

   
advantages of financial statement analysis
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5. Tax Determination

Financial statement analysis shows accurate financial position and profitability of the business. So, it helps to determine tax liabilities of the company.

6. Credit Decision

Financial statement analysis helps the bankers to make credit decision by providing up-to-date information regarding profitability, solvency, liquidity and efficiency of the business firm.
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Disadvantages Of Holding Company

Business , Marketing
Major drawbacks or disadvantages of holding company can be expressed as follows:

1.  Problem Of Over Capitalization

There is a high possibility of over capitalization in holding company because of large capital. It negatively affects the profitability and is not beneficial for both holding and subsidiary companies.

2. Fear Of Monopoly

Formation of holding company may create monopoly in the market. Consumers may be exploited by high prices and artificial scarcities.

3. Oppression Of Minor Shareholders

There is a high chance of dominance over minority shareholders. Their interests may be ignored by the management of holding company.

4. Costly 

Holding company has to spend a lot of money to manage and control different units and subsidiary company. It spends more money for officers and directors. It suffers from high administrative costs also.
disadvantages holding company
5. Misuse Of Funds

Directors of holding company posses unlimited power. So, they may misuse the funds of the company.

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6. High Chance Of Fraud

Due to the lack of transparency, there is a chance of committing fraud in holding company.

7. Difficult To Manage

It is very difficult to handle or manage holding company properly. It is difficult to maintain coordination, supervision and control different units and subsidiary company effectively by a centralized authority.
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Advantages Of Holding Company

Business , Marketing
Main benefits or advantages of holding company can be expressed as follows:

1. Eliminate The Competition

Because of centralized control and same group of management it is possible to avoid competition between subsidiary companies and holding company. It helps to maximize profitability of both companies.

2. Easy To Form

Formation of holding company does need legal formalities and consent of subsidiary. It can be established or formed simply by purchasing the shares of other business company direct from open stock market.

3. Large Capital

Holding company can raise large amount of capital to expand its business operation.
advantages holding company
4. Identity And Goodwill

Identity and goodwill of both holding company and subsidiary company is established and increase their image before the public.

5. Secrecy

Another benefit of formation of holding company is that high level of secrecy can be maintained because of centralized authority and control.

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6. Stability

Holding company is highly appreciated and accepted by the public because of large capital, adequate resources and effective management. So, formation of holding company ensures stability.

7. Separate Books Of Account

Both holding company and subsidiary company records their financial transactions separately and maintain their own accounting system. It helps to know their business performance and financial position separately.

 8. Economical

Holding company is economical in nature because of large volume of production, centralized control. It helps to minimize administrative and marketing expenses. It can also enjoy the cash discount and quantity discount because of bulk purchase of materials and supplies.
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Disadvantages Of Business Combination

Business , Marketing
Main drawbacks or disadvantages of business combination can be expressed as follows:

1. Bad Effects Of Monopoly

Business combination creates monopoly in the market. So, consumers may suffer from the evils of monopoly such as high price, low quality products, scarcities and black marketing.

2. Risk Of Over Capitalization

Combined business may suffer from over capitalization because of huge and unused capital. It may result in wastage of resources, fall in profit and lower rate of return.

3. Threat To Small Firms

Business combination is a big threat to other small business firms of similar nature. It is very difficult for small firms to survive and compete with combined firms. 

Business combination creates complexity to perform management function like coordination, controlling, supervision, directing etc. 

5. No Identity And Goodwill

Identity and goodwill of old companies finish or decrease after combination.
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Advantages Of Business Combination

Business , Marketing
Major benefits or advantages of business combination can be expressed as follows:

1. Eliminate The Competition

Business combination helps to eliminate the possibility of cut-throat competition between or among two or more than two business companies of same nature.

2. Raise Capital

Business combination helps to raise large amount of capital which helps to expand business activities by acquiring new technology and adopting improved methods of production.

3. Cost Reduction

Large volume of production is possible because of business combination. So, production cost per unit can be reduced. Similarly, administrative, distribution and management costs can be minimized.

4. Low Purchasing Cost

Large scale purchase is possible because of business combination. It helps to reduce materials costs and transportation costs per unit due to bulk purchase of goods.

5. Fair Selling Price

Company can fix fair and reasonable amount of selling price for its products and services. Because of large scale production, low purchasing costs of raw materials, and low administrative and distribution expenses selling price can be fixed at minimum level.

6. Monopoly

Business combination helps to achieve monopoly in the market by eliminating competitors.

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7. Market Control

Business combination helps to control total market by using the power of monopoly. Company can control the market price and supply of its product.
advantages business combination
8. Control Over And Under Production

Business combination helps to control over and under production of goods and services by adjusting demand and supply. 

9. Increase Reputation

Business combination helps to increase goodwill, reputation and positive image of the company.

10. Stability

Business combination ensures the stability of the business because of large capital, large scale production, monopoly, regular production and proper supply of goods and services.
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