Which of the following indicate limitation of Financial analysis:

Financial analysis has several limitations, and one major limitation is that it does not consider price level changes.

Financial statements are prepared on the basis of historical cost. When there is inflation or deflation in the economy, the purchasing power of money changes. However, financial statements continue to record assets, liabilities, revenues, and expenses at their original historical values without adjusting for these price level changes.

This creates issues when:

• Comparing financial data across different time periods (inter-firm comparison becomes difficult)
• Assets purchased in different years appear at different price levels
• The real profitability and financial position may be distorted

For example, if machinery was purchased 5 years ago at ₹10,00,000 and similar machinery today costs ₹15,00,000 due to inflation, the balance sheet still shows the old machinery at ₹10,00,000 (less depreciation). This makes the financial position appear different from the actual economic reality.

The other options describe advantages of financial analysis:

• Option 1 describes its analytical capability
• Option 3 describes its utility in assessing liquidity
• Option 4 describes its usefulness to stakeholders

Therefore, Option 2 correctly identifies a limitation of financial analysis.