Explain the importance and limitation of financial statement analysis which tools are used for purpose of analysis?

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Importance of Financial Statement Analysis:
Financial statement analysis is crucial for various stakeholders like investors, creditors, and management to make informed decisions. It helps in assessing the financial health and performance of a company. Some key importance includes:

Assessing profitability and efficiency
Evaluating liquidity and solvency
Identifying trends and patterns
Comparing performance with industry benchmarks

Limitations of Financial Statement Analysis:
Despite its significance, financial statement analysis has certain limitations that need to be considered while interpreting the results. Some limitations include:

Dependence on historical data
Impact of accounting policies and estimates
Not considering non-financial factors
Potential manipulation of financial statements

Tools used for Financial Statement Analysis:
There are various tools and techniques utilized for financial statement analysis to derive meaningful insights. Some common tools include:

Ratio Analysis: Helps in evaluating various aspects of a company's financial performance such as liquidity, profitability, and efficiency.
Vertical Analysis: Involves comparing each line item in the financial statement to a base item to assess the relative proportion.
Horizontal Analysis: Examines the trends in financial data over multiple periods to identify growth or decline.
Common Size Analysis: Standardizes financial statements by expressing each line item as a percentage of a base item.

By utilizing these tools, stakeholders can gain a deeper understanding of a company's financial position and performance, enabling them to make well-informed decisions.

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