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CMA Intermediate · Financial Management and Business Data Analytics · Financial Ratio Analysis

Which of the following is a recognised limitation of financial statement analysis based on published annual reports?

A recognised limitation is that historical cost figures may not reflect current values and that different accounting policies reduce comparability between firms. The other statements are false, as ratios work for profitable firms, anyone can analyse statements, and trends can span many years.

  1. ARatios cannot be computed for firms with positive profit
  2. BHistorical cost figures may not reflect current values, and differing accounting policies hamper comparabilityCorrect
  3. CIt can be performed only by statutory auditors
  4. DTrend analysis cannot be applied to more than two years

Explanation

Statements are prepared on historical cost and firms may choose different accounting policies, so inter-firm and inflation-affected comparisons can mislead. The other options are factually false: ratios can be computed for profitable firms, anyone may analyse, and trends use many years.

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