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Myths about Financial Statement Analysis
by Michael C. Dennis, M.B.A., C.B.F.

Some common misconceptions about financial statement analysis:

Myth: Financial statement analysis should be used to establish credit limits.
Reality: Financial statement analysis is part the risk Conditions in which the decision maker has to estimate the likelihood of certain outcomes. assessment process.

Myth: Audited financial statements are completely reliable.
Reality: Financial fraud occurs every day.

Myth: Requesting financial statements is just asking for trouble.
Reality: Creditors requesting financial information is routine, as is the fact that privately held companies often ignore these requests.

Myth: Industry norms are a good way to benchmark customers' financial performance.
Reality: Published figures and industry norms are often heavily influenced by data from publicly traded companies, and publicly traded companies in most industries are not the norm.

Myth: A strong current ratio means the company under review is highly liquid and will pay debts as they mature.
Reality: A high current ratio makes it more likely the debtor can pay its debts, but does not address whether the customer will do so.

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