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CS Executive · Corporate Accounting and Financial Management · Financial Statement Analysis

Which of the following is a recognised limitation of comparative financial statements?

Comparative statements are meaningful only when consistent accounting policies are used across the years compared. If policies change, the figures are not truly comparable and the changes can mislead. They do show absolute changes, cover multiple years, and do not remove inflation.

  1. AThey cannot show absolute changes between years
  2. BThey are meaningful only if the same accounting policies are followed in the years comparedCorrect
  3. CThey can be prepared for only one year
  4. DThey eliminate the effect of inflation completely

Explanation

Comparative statements show both absolute and percentage changes and cover two or more years. Their usefulness is reduced if accounting policies change between periods, since figures are then not comparable. They do not remove inflation effects.

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