How to write a financial statement

This article was co-authored by Kathy Duong. Kathy Duong is a certified accountant who has been working as an accountant for over 25 years. She received her BS in Finance and Accounting from California State University, Los Angeles in 1992.

There are 21 references cited in this article, which can be found at the bottom of the page.

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Financial statements are the formal record of a company’s financial activity. The main components of a financial statement are the balance sheet, the income statement, and the statement of cash flows. The balance sheet shows the assets, liabilities, and the shareholder’s equity at a specific point in time. The income sheet, on the other hand, shows the revenues, expenses, and income or loss for a specific period of time, usually a month, quarter, or year. The statement of cash flows shows the cash balance at the beginning of a period, the inflows and outflows of cash during a specific period, and the ending cash balance. For public companies, what goes on these sheets is regulated by the Securities Exchange Commission in compliance with Generally Accepted Accounting Principles (GAAP) established by the Financial Accounting Standards Board (FASB). You should hire a professional to make sure you are compliant with those standards if you are unfamiliar with them.

How to write a financial statement


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In Microsoft Excel, common size financial statements compare cells against the balance total to determine what percent those figures have increased or decreased. Excel creates a new blank column in which to compare the figures. The cell formula uses the previous cell’s figures divided by the balance total and then formats the result as a percentage. Once the formula in the first cell is completed, it can be copied down the column.

Launch Excel and open the balance sheet with your financial statement figures.

Click the column letter above the column that is next to the “Assets” column. For example, if the “Assets” column is column B, click column C to highlight it. Right-click and select “Add New.” A new blank column appears to the right of the “Assets” column.

Locate the cell containing the balance total. For example, if the balance total is in column B, row 1, then the cell with the balance total is B1.

Select the first blank cell in the column you created. Type an “=” sign into the cell, then click the cell immediately to the right to highlight it. The cell number automatically appears next to the “=” sign.

Type the “/” sign, then type the cell number with the balance total. The cell formula looks similar to this: “=previous cell/balance total cell”.

Format the “Balance Total” cell in the cell formula with the absolute reference, so that when copied down the column, all cell formulas use the same figure. For example, the formula looks like this, where B6 is the cell with the balance total: “=previous cell/$B$6”.

Press the Enter key in the cell formula to see the calculation. Click the “Home” tab and select “Format” in the Cells group. Click “Percent” to change the calculation to a percentage.

Copy the cell formula down the blank column by clicking the corner and dragging downward. All cells in the column will be formatted and appear as percentages.

A complete and well-researched guideline on some of the most important steps you should take towards completing a well-written financial statement.

A financial statement is a document containing a written record of the financial activity and record of a company or a business enterprise. A financial statement contains several contents: a statement of retained earnings, statement of cash flow, income statement, and balance sheet. A company or an industry may decide to generate their financial statements monthly, quarterly, or annually within a financial year. Generally, people always believe that producing and after that, reading financial statements entails an overwhelming process as well as a vast amount of information. Although the statement is true, there is no need to be scared, since once you master all the required skills, you will be able to save a lot of cost and time for your business. People struggling to write their financial statements can always seek assistance from this website.

A financial statement plays a significant role in a business, both internally and externally. The investors of any company use the financial statements to make important decisions since those statements aids in better understand the opportunities for growth and the progress of a business. Furthermore, financial statements are a requirement by external stakeholders such as creditors and investors. The statement provides significant insights into a company’s current financial position, cash flow prospects, and resources. Essentially, financial statements aid businesses in making important decisions since they provide a clear visual representation of the enterprise’s current financial status.

To learn how to create a financial statement, you need to have the potential financiers, shareholders, and your personal insights. The financial statement created for most businesses contains an income statement and a balance sheet. Most financial statements are prepared by an accountant. Currently, the advancement of technology has made it possible for people to make use of computer software in preparing their financial statements. The first step in preparing a financial statement is creating a balance sheet.

Balance sheet

A balance sheet is also known as a statement of financial position since it provides an accurate financial position of a business at a particular time. A balance sheet lists the assets, liabilities, and the differences between the two, which is known as the net worth or equity. The accounting equation of a balance sheet is that (Assets = liabilities + owner’s equity).

An income statement

On the other hand, an income statement indicates the loss, income, or expenses for a particular duration. In other terms, a financial statement indicates the balance at the beginning of a certain duration, the outflows and inflows of finances, and the ending cash balance.

When creating a balance sheet, the first important step is acquiring a good understanding of a balance sheet’s basics, which entails the assets, liabilities, and shareholders’ equity. The general equation for a balance sheet is that Assets = liabilities + owner’s equity. When rearranging the equation, an individual will notice that the shareholder’s equity equals assets minus liabilities. In essence, a balance sheet demonstrates the relationship between liabilities, assets, and equity.

The third step involves writing all the information and determining the liabilities. Liabilities, which can be divided into current and long term, entail the debts of the company. The long term liabilities include the bonds payable, long term loans, or any other loans, which are to be paid after a particular duration. On the other hand, the current liabilities entail things like the things the company owes or has paid to other companies.

The following step is listing the company’s operating expenses. In a balanced sheet, the operating expenses are normally divided into operating and non-operating expenses. Whereas the operating costs involve the cost of goods that have been sold, the non-operating expenses, on the other hand, are not related directly to the operations of the company.

A personal financial statement

The format of a financial statement is standard in the sense that it shows the liabilities on the right and assets on the left side, similar to a balance sheet. When creating your financial statement, you first need to gather all the relevant information about the assets and liabilities. The following are some of the common assets and liabilities that should be included in your financial statement;

The unpaid taxes from the previous years

The money owed from outstanding liabilities, lien, or small claims

Credit card debt

A copy of the latest statement on the various loans an individual has

It is important to note that whereas there are some loans, such as stocks, which have a specific monetary value, there are others that cannot be accounted for easily. In situations where an individual is not sure about the value of the assets, they should try as much as possible to identify a reasonable and realistic price. Part of creating accurate financial statements is being familiar with the common misconceptions surrounding the topic. Having a good understanding of these misconceptions in financial statements will assist you in avoiding most of the common mistakes. One of the most significant financial statement objectives is accuracy, which can only be achieved by avoiding common mistakes.

Things that you should consider

The financial statement, which contains several contents such as a statement of retained earnings, statement of cash flow, income statement, and balance sheet, is considered one of the most important documents for any business. Viewing all these elements, holistically can help an individual make wise financial, investment, and management decisions for a company. At times, you may encounter diverse challenges when creating your financial statement. As a result, you should be open to seeking assistance from an accountant or any other person with finance knowledge.

How to write a financial statementAssessing your financial situation can help you understand your options for creating a steadfast financial future. To outline your finances, a personal financial statement can provide an overview of your financial circumstances. With this in mind, here’s how a personal financial statement is used and how to create one for yourself. If you’d like hands-on guidance in creating a personal financial statement and using it to strategize your overall financial plan, consider enlisting the help of a trusted financial advisor.

What Is a Personal Financial Statement?

A personal financial statement (PFS) is a document or set of documents that outlines a person or family’s financial position. The balance sheet portion of a PFS exhibits your assets and liabilities, or net worth. Some people create more detailed personal financial statements, including an income statement or other documents.

A person should create a PFS if he wants to make financial plans. These statements are usually goal-oriented and can help individuals and families reach their financial objectives. They are especially important for young professionals who are just starting their financial journeys. If you’re new to financial planning, a PFS is a great place to start because it will help you understand your current position as well as your options for moving forward.

A PFS is often used when someone is taking out a personal loan. Lenders may ask a potential borrower to create a PFS to understand their debt to income ratio, which is a determining factor in the interest rate and amount that the borrower will receive.

What to Include in Your Personal Financial Statement

As previously mentioned, there are two core sections of any PFS. Here’s how each section can be defined:

  • Balance sheet. Your balance sheet will include all your assets and liabilities. This may include your home, mortgage, car, auto loan, taxes, savings accounts, investment accounts, credit card balances and more. Note that the balance sheet does not include cash flow but does include the total amounts due or the total value of each account.
  • Income statement. Your income statement will include your salary, bonuses and commissions. It may also include any dividends and interest earned, gig income or other income. It will also include your income taxes, insurance premiums and other steady cash outflows. This may include monthly paychecks, budget line items such as a monthly grocery bill and other monthly payments that detract from your monthly income.

What to Exclude from Your Personal Financial Statement

How to write a financial statementYour PFS is broken down into assets and liabilities. However, there are several things that you will not include in your PFS.

If you own a business or have business-related assets and liabilities, they will not be included on your PFS unless you are directly responsible for the costs. An example of this is if you are taking out a personal loan for your business.

Additionally, anything rent is not included on a PFS, because the asset is not owned by the individual. An example of this is rent on office space. However, if you own office space and rent it out to someone else, the rent you collect is considered income and would be included in a personal financial statement.

Other things that are not included on a PFS include small personal property assets such as furniture and household goods. While they may be a large expense, they are not typically valuable enough to qualify as an asset.

Example of a Personal Financial Statement

Now that you understand what a personal financial statement is and why it’s important, let’s look at an example. Take, for example, Sam who is a young professional and wants to start planning for retirement. She has started saving with her company’s 401(k) match, purchased her first home and has a car that she loves. However, she wants to be sure that she is set up well for retirement, so her financial advisor has asked her to prepare a PFS to understand where she stands currently.

Sam’s home is worth $200,000, and the car she drives is worth $30,000. After several years of working hard, she has $60,000 in investments and 401(k) funds and she keeps about $5,000 in an emergency fund. Her assets total $295,000.

For liabilities, she owes $150,000 on her home, $10,000 on her car and she has about $3,000 in credit card debt. She pays the minimum balance or payment on each liability each month. Her liabilities total $163,000.

Her assets are worth $295,000 but she owes a total of $163,000. Therefore, when we subtract her liabilities from her assets, her net worth is $132,000.

The Bottom Line

How to write a financial statement

A personal financial statement is a common starting point for people who are looking to invest or borrow money. It helps both the individual and the financial institution understand the person’s financial responsibility and what his or her options are moving forward.

If you need help finding a financial advisor, try our financial advisor matching tool. A financial advisor can help you make educated decisions regarding your assets, liabilities and wealth creation.

Definition and Examples of a Personal Financial Statement

How to write a financial statement

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A personal financial statement is a document that details an individual’s assets and liabilities. It’s often used by lenders to learn a loan applicant’s net worth and other details of their financial life.

Learn how to prepare a personal financial statement, and why it’s so important for loans.

What Is a Personal Financial Statement?

A personal financial statement details your finances in a simple form. This is an important document for those seeking a business loan proposal. It allows lenders to quickly glean your assets and liabilities. If you are married, the personal financial statement may include your spouse’s assets and liabilities, as well.

Your assets are the things you own that you can turn into cash, such as a home, a checking account balance, or stocks. Your liabilities are amounts you owe to others, such as your mortgage, student loans, and credit card debt.

Your net worth is the difference between your assets and your liabilities, so your financial statement will allow lenders to determine your net worth. For example, if you have a house and a car with a value of $100,000, and you have a mortgage and car loan for $75,000, your net worth is $25,000.

Net worth for an individual is similar to owner’s equity for a business. Therefore, a personal financial statement is similar to a business’s balance sheet.

How a Personal Financial Statement Works

If you are presenting a business plan or business loan request to a lender, they will probably ask for a personal financial statement. You may be asked to provide a personal guarantee for part of the loan, or you may have to pledge some of your personal assets to guarantee the loan (this is called a “collateral loan”).

If you have to pledge some of your assets, the personal financial statement will be required so the lender can see if you have enough assets to cover the loan. The personal financial statement will also detail the kinds of assets you have. For example, if you are pledging investments (like an IRA or 401k), the bank will need to know the amount of the investment and where it is kept.

The Small Business Administration (SBA) has a sample personal financial statement you can use to collect the information you need.

How Do I Prepare a Personal Financial Statement?

The format of the personal financial statement is standard. It shows assets on the left and liabilities on the right (like a balance sheet). Net worth is also displayed on the right-hand side of the statement.

To begin, start gathering information about assets and liabilities. The people reading your personal financial statement know that it simply captures your net worth a point in time, so prepare the document with the most recent information you have, but don’t worry if some of the documents are a few weeks old. Your lender understands that some of this information is constantly in flux.

Some of the assets and liabilities that should be listed include:

  • Cash in a checking or savings account
  • An IRA, 401(k), or any other retirement accounts
  • Brokerage accounts
  • A copy of the latest statement on your home mortgage, with the balance outstanding (you may also need a recent appraisal)
  • A copy of the latest statement on your car loan, boat loan, or any other loans
  • Personal property with significant value that can be verified with an appraisal, such as antiques or jewelry (but not household goods or furniture)
  • Credit card debt, and any other debt that may show up on a credit report
  • Any joint debt you took on by being a co-signer on a loan with someone (this is called a “contingent liability”)
  • Money owed from a small claims judgment, lien, or similar outstanding liabilities
  • Unpaid taxes from previous years, including any business payroll taxes for which you are personally responsible

Some assets—like stocks—have a clear dollar value, but not all assets are as easy to account for. If you are unsure of the value of assets, do your best to get a reasonable figure, but be realistic. If the lender wants to use the asset for a guarantee on your business loan, they will do an appraisal.

Rentals aren’t included in a personal financial statement, because there is no ownership. Renting a house or leasing a car creates a monthly expense, but you don’t own these items, so they don’t get included in this statement unless you’re specifically asked to detail your expenses.

Some personal financial statement formats ask you to include your annual income and expenses. The income should match your most recent income tax return. The expenses should include taxes, insurance payments, and an estimate of any other regularly occurring expenses.

As part of your preparation for presenting your business plan, you should run a complete credit report on yourself. The lender will certainly do this, and you want to know what they’ll find. This means going beyond the FICO score to get a full report that shows details.

When you have entered all the information on assets and liabilities, you can finally calculate your net worth by subtracting the liabilities from the assets.

You may find that you have a negative net worth, meaning that you owe more than you own. If that’s the case for you, don’t try to change the document by eliminating liabilities or over-estimating assets; just accept your situation. Knowingly misrepresenting yourself on a financial statement could result in up to five years of imprisonment and a fine of up to $250,000.  

Unfortunately, not everyone striving for education can afford it. Some courses are so expensive that even well-to-do citizens apply for a scholarship or refuse the undertaking. In such a case, students are supposed to submit a financial need essay.

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Funding authorities cannot assist each student. That is why you need to assure them that you deserve the scholarship more than anyone else. This article by Custom-Writing experts provides you with a clear structure and samples of a financial need essay.

✅ Statement of Financial Need: What to Include

This type of writing is a statement of a student’s life circumstances. But there is a limited number of aspects that you need to include. Otherwise, the committee will reject your request for financial aid as it will not look persuasive enough. Follow the next five steps to write a scholarship-winning essay. If you will still be unsure of how to write this kind of paper, explore the example in the next section.

Here, you can read about other secrets of scholarship essay writing.

🚫 Financial Need Essay: Mistakes to Avoid

There are several big mistakes that students can make in their scholarship essays.

Whining Do not write about your own financial needs, about how poor you are and how hard you have to work to support your old parents or a disabled sibling. Yes, this can happen to everyone, but an excellent financial need essay is not the right place to whine about such difficulties. On the contrary, show that you have learned to overcome the challenges.
Non-challenging challenges Everyone has their unique challenges and experiences. When you talk about your challenges, make sure they’re worthwhile to the reader.
Too general essays In some cases, you need to write several financial need essays to apply for several financing opportunities. It is OK, but you have to write a unique financial needs essay for each program. Do not make a general essay that has different names of sponsoring organizations.

👀 Scholarship Essay on Financial Need: Example

PARAGRAPH #1 Introduction I have seen how important learning is in everyone’s life since childhood. My parents did not have a chance to attend college as they had to earn their living. It affected their career, and the lack of education will be felt for the rest of their lives. We have never been a wealthy family, but my parents did their best to instill a love for learning in me.
PARAGRAPH #2 How are you paying for college now? Previously, I had to work 20 hours per week to support myself. My parents paid most of the tuition fees, but I did my best to relieve this burden. Due to the lockdown, their earnings were cut by half. So now I will have to work more or drop out of college.
PARAGRAPH #3 Justify your financial need Moreover, the next year’s curriculum includes more subjects. That is why I will not be able to work as much anymore. I could work night hours, but I am afraid it would worsen my results. In any case, I will do my best to cope with all assignments.
PARAGRAPH #4 What are your benefits? If I am awarded the scholarship, I will have plenty of time to dedicate myself to the studies. Education, service to others, and striving for a future career are my top priorities. This scholarship will be my motivation for achieving academic excellence.
PARAGRAPH #5 Closing statement Your kind consideration will be highly appreciated.

We hope that this short, but comprehensive guide will get your essay going! Good luck and be sure to check out our blog for more writing tips.

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College is an investment, but for many students financial aid may not be enough to cover the cost. Because of this, students may find themselves needing to write a statement of financial need, which is a brief statement explaining your financial situation. Generally, the statement of financial need will go beyond what is captured by the FAFSA or CSS profile.

Many students want to know how to write a statement of financial need since it is a challenge. Deciding what is appropriate to include or omit can make all the difference, so it’s also especially important that you use your words economically and effectively. In this article, we will provide a step-by-step guide to show you how to write a statement of financial need.

We’ll start with a “Do’s and Don’ts” list. This list will answer questions you may have about which details to include in your statement. Once you’ve got an idea of what should be included, we’ll show you a general template for writing these statements, including some examples. This will help you illustrate your points thoroughly while staying under the word limit.

What to include in your statement

  • A quick rundown of your family’s employment situation. This includes who in the family is working, what type of job they hold, and if you are working to help support your education or to help support your family
  • Whether you are a first-generation college student
  • If you or your parents are immigrants or refugees
  • Whether you or your parents speak English as a second language, or do not speak English at all
  • If you were raised by a single parent, or in a foster home
  • Any extenuating circumstances that could be affecting your family’s finances, such as medical issues or job loss. Any recent shortfall in your family’s financial situation is worth mentioning
  • If you are a member of any minority group (for many colleges, recruiting underrepresented students is an institutional priority as they seek to create a diverse community).
  • Opportunities that you would be able to accept if the scholarship helped meet your financial need. An example would be if you are pursuing an unpaid or low-paying internship over the summer, but needed to earn money to help pay for next semester’s tuition

What to avoid in your statement

  • Try to avoid a negative or dramatic tone. Even if your financial situation is stressful, try not to communicate that stress in your statement. It’s best to let the facts speak for themselves.
  • Avoid comparing your situation with the situations of others. Remember, this essay is about you, and why someone in your situation could benefit from the scholarship.
  • Avoid focusing too much on tangential details. Try to only include the details that are immediately relevant to your ability to further your education. For example, if your family has experienced a financial shortfall because your father lost his job, you don’t need to go into details of your father’s business or his chance of being re-hired. You need only to mention that it has led to your family receiving less than their projected income for the year, and that this impacts your ability to pay for college.

Now that you know what to include in your essay, you’re ready to start writing your statement of financial need. This can be done by following a step-by-step process:

Let’s get started with the first step…

Create an outline

To get started with your outline, try writing out a bullet-point list of the details you’d like to include in your essay. Include all of the details that emphasize your financial need. This includes demographic information, your parents’ employment, and any extenuating circumstances your family is experiencing. Once you have that list, use it as a guide to help format the statement of financial need.

Write your introduction

In your first sentence, introduce yourself by touching on some key demographic points about yourself. For example, you could write:

“As a first-generation college student who was raised by a single parent, I have worked as a cashier throughout high school to help pay the bills.”

These are all points that do not require too much elaboration. They can be brought up together in the first sentence to give the reader an idea of what they will be reading. Use the rest of the introduction to quickly lay out the discussion points, saving the detail for later.

Formatting your essay with body paragraphs

Body paragraphs are your opportunity to dive into the relevant details. Elaborate on the points that you mentioned in the introduction to give a more vivid picture of why you are having trouble paying for your education. These include extenuating circumstances, parents’ employment status, and your employment status.

In addition, you can use these paragraphs to help illustrate your sense of financial responsibility. If you have a college savings account or have taken initiatives to help yourself secure the funds for college, mention them here. Emphasize that there is still a gap between what you are expected to pay and what you are able to pay.

Finish with a strong conclusion

Now is the time to discuss how the increased funding would create opportunities for you. You can mention the internship that you would take if you didn’t have to work all summer to pay your tuition, or describe how one of your other financial hardships would be lightened by receiving this scholarship.

The conclusion is where you make the scholarship committee realize what they could do for you by granting you the scholarship; once you’ve established your need, use the conclusion to illustrate how important this opportunity is to you. We hope that you now know how to write a statement of financial need. Best of luck!

Submitting your statement of financial need is not a guarantee of more aid

We should also mention that submitting your statement of financial need is no guarantee that you will receive more financial aid. While students can be hopeful that they will receive an adjusted aid package, they should be prepared for their situation not changing.

In this case, students can turn to options like scholarships, student loans, or choosing a more affordable college option.

How to write a financial statement

About Gabriel Jimenez-Ekman

Gabriel Jimenez-Ekman is a Scholarships360 writer who focuses on scholarships and financial aid. He has managed communications and written content for a diverse array of organizations, including a farmer’s market, a concert venue, a student farm, an environmental NGO, and a PR agency.

Gabriel graduated from Kenyon College with a degree in sociology.

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This Project has been very useful to me because I learned how to prepare cash flow statements and ratio analysis. This has improved my knowledge on financial statements which is very useful in business and commerce ever day. The work I did in this project has helped me to understand the techniques, applications and usefulness of financial statements to understand the performance of a particular company or enterprise without much difficulty and also understand how to prepare them in future. I came to the following conclusion while preparing this project.

Purposes of Financial Analysis

Judging The Earning Capacity
On the basis of the financial analysis, the earning capacity of the business concern may be computed. In addition to this, the future earning capacity of the concern may also be forecasted. All the external users of accounts, specially the investors and potential investors are interested in this. Judging The Managerial Efficiency

The financial statement analysis helps to pinpoint the areas where in the managers have shown better efficiency and the areas of inefficiency. For example, using financial ratios, it is possible to analyze relative proportion of production, administrative and marketing expenses. Any favorable or unfavorable variations can be identified and reasons thereof can be ascertained to pinpoint managerial efficiency and deficiency Judging The Short-term & Long-term Efficiency Of The Enterprise On the basis of financial analysis, long-term as well as short-term solvency of the concern may be judged. Creditors or suppliers are interested to know the short-term solvency/liquidity of the concern i.e. ability to meet short-term liabilities. Debenture holders and lenders judge the ability of the company to pay the principal amount and interest on the basis of financial analysis

Inter-Firm Comparison
Inter-firm comparison becomes easy with the help of financial analysis. It
helps in assessing own performance as well as that of others, if merges and acquisitions are to be considered. Making Forecasts & Preparing Budgets

Past financial statement analysis helps a great deal in assessing developments in the future, especially the next year. For example, given a certain investment, it may be possible to forecast the next year’s profit on the basis of earning capacity shown in the past. Analysis thus helps in preparing the budgets. Understandable

Financial analysis helps the users of the financial statements to understand the complicated matter in simplified manner. Different date can be made more attractive by charts and diagrams which can be easily understood Uses of Financial Statement

Security Analysis
It is a process by which the investor comes to know whether the firm is fulfilling hi expectation with regard to payment of dividend, capital appreciation and security of money. Such analysis is done by a security analyst who is interested in cash-generating ability, dividend payout policy and the behavior of share prices Credit Analysis

Such analysis is useful when a firm offers credit to a new customer or a dealer. The manager of the firm would like to know whether to extend credit to them or not. Such analysis is also useful for a bank before granting loan to the public. Debt Analysis

Such analysis is done by the firm to know the borrowing capacity of a prospective borrower. Dividend Decision
Financial analysis helps the firm in deciding about the rate of dividend. Management would have to decide about how much portion of earnings to distribute and how much to retain. Such decisions indicate the profitability of the firm and hence to some extent affect the behavior of share prices General Business Analysis

Financial analysis can be used to identify the profit drivers and business
risks in order to assess the profit potential of the firm. It helps in the future growth scenarios of the firm Limitations Of Financial Statement

Financial statement analysis is a historical analysis. It analysis what has happened till date. It does not reflect the future. Person like shareholders, investors, etc are more interested in knowing the likely position in the future.

Ignore Price Level Changes

Price level changes and purchasing power of money are inversely related. A change in the price level makes analysis of financial statements of different accounting years invalid because accounting records ignore change in the value of money

Qualitative Aspects Ignored

Since the financial statements are confined to the monetary matters alone, the qualitative aspects like the quality of management, quality of labor force, public relations are ignored while carrying out the analysis of financial statement

Not Free From Bias

In many situations, the accountant has to make a choice out of alternative available, e.g. choice in the method of inventory valuation or choice in the method of depreciation. Since the subjectively is inherent in personal judgment, the financial statements are, therefore, not free from bias

Variation In Account Practices

For inter-firm comparison, it is necessary that accounting practices followed by the firms don’t vary significantly. As there may be variations in
accounting practices followed by different firms, a meaningful comparison of their financial statements is not possible