Question

Assertion (A): Limitations of Financial Statements, such as the influence of accounting concepts, disclosure of only monetary facts, etc., are also the limitations of financial analysis.

Reason (R): Financial Statements are used as the basis of financial analysis.

In the context of the above two statements, which option is correct?

Options

• Both Assertion (A) and Reason (R) are correct, but Reason (R) is not the correct explanation for Assertion (A).

• Both Assertion (A) and Reason (R) are correct, and Reason (R) is the correct explanation for Assertion (A).

• Assertion (A) is correct, but Reason (R) is not correct.

• Both Assertion (A) and Reason (R) are not correct.

Answer 1

Both Assertion (A) and Reason (R) are correct, and Reason (R) is the correct explanation for Assertion (A).

Explanation:

Assertion (A) is correct because any weakness present in the raw accounting data will automatically carry forward into the final analysis. Reason (R) is also correct and provides the exact logical explanation because financial statements form the basic source material and foundation for conducting financial analysis; therefore, if the base documents ignore inflation or non-monetary facts, the analysis cannot rectify or overcome those limitations.