ACCA Applied Knowledge · Financial Accounting · Ratios
Which of the following best describes the main purpose of calculating ratios from a company's financial statements?
Ratios turn raw financial statement figures into relationships that can be compared over time, between entities and against industry benchmarks. They do not guarantee future results, replace the notes or give assurance that the statements are free from misstatement.
- ATo replace the need for reading the notes to the financial statements
- BTo guarantee that future profits will follow past trends
- CTo convert raw figures into relationships that allow comparison over time, with other entities and against benchmarksCorrect
- DTo verify that the financial statements are free from material misstatement
Explanation
Ratios express relationships between figures so users can compare performance and position across periods, competitors and industry averages. They do not replace the notes, predict the future with certainty or provide audit assurance.
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