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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 using ratio analysis to compare two companies in the same industry?

Differing accounting policies, such as depreciation methods or asset revaluation, can make ratios of two companies not directly comparable. Ratios are computed from historical IFRS figures, and comparing companies in the same industry is normal practice, though care is needed.

  1. ARatios cannot be calculated from IFRS financial statements
  2. BDifferences in accounting policies, such as the depreciation method or revaluation of assets, may make the ratios not directly comparableCorrect
  3. CRatios always use forecast figures rather than historical figures
  4. DCompanies in the same industry are never able to be compared

Explanation

Ratios use historical figures that depend on accounting policies. Different depreciation methods or revaluation policies change profit and asset values, so comparisons can mislead. The other options are false statements: ratios can be calculated from IFRS statements, they use historical data, and comparison within an industry is a common practice.

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