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

Which of the following is a recognised limitation of ratio analysis?

A recognised limitation is that ratios based on historical figures may not reflect current price levels. Inflation and differing accounting policies distort comparisons, so ratios must be interpreted with care alongside other information.

  1. ARatios cannot be computed from published financial statements
  2. BRatios eliminate the effect of differing accounting policies between firms
  3. CRatios based on historical figures may not reflect current price levelsCorrect
  4. DRatios can only be used for internal comparison within one firm

Explanation

Ratios are drawn from historical-cost statements, so inflation can distort them and comparisons over time. Different accounting policies actually reduce comparability, ratios are computed from published statements, and they can be used for inter-firm comparison.

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