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ACCA Applied Knowledge · Financial Accounting · Importance and purpose of analysis of financial statements

Which of the following is a limitation of comparing a company's ratios with those of another company in the same industry?

A key limitation is that companies may use different accounting policies, such as depreciation methods or inventory valuation, so reported figures and ratios are not directly comparable. Size differences are not a barrier because ratios are relative, and IFRS does not prohibit industry comparisons.

  1. ARatios cannot be calculated for companies of different size
  2. BDifferences in accounting policies, such as depreciation methods, may make the ratios not directly comparableCorrect
  3. CRatios are only valid if both companies have the same year end date
  4. DIndustry comparisons are prohibited by IFRS

Explanation

Different accounting policies, for example depreciation methods or inventory valuation, change reported profit and asset values, so ratios may not be like-for-like. Ratios are calculated relatively, so size is not a barrier, and IFRS does not prohibit comparison. Year-end differences can matter but are not a requirement for validity.

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