Some common misconceptions about financial statement analysis:
Myth: Financial statement analysis should be used to establish
Reality: Financial statement analysis is part the risk Conditions
in which the decision maker has to estimate the likelihood of certain outcomes.
Myth: Audited financial statements are completely reliable.
Reality: Financial fraud occurs every day.
Myth: Requesting financial statements is just asking for
Reality: Creditors requesting financial information is
routine, as is the fact that privately held companies often ignore
Myth: Industry norms are a good way to benchmark customers'
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.