ACCA Applied Knowledge · Financial Accounting · Ratios
Which of the following is a recognised limitation of using ratio analysis to assess the performance of a single company?
Ratios rely on historical cost figures, so asset values may be out of date and distort measures such as return on capital employed. The other statements are false because ratios apply to any entity and do not eliminate differences in accounting policies.
- ARatios are based on historical cost figures, so they may not reflect current values of assetsCorrect
- BRatios cannot be calculated from the statement of financial position
- CRatios can only be computed for companies listed on a stock exchange
- DRatios remove the effect of differing accounting policies between companies
Explanation
Financial statements are largely prepared using historical cost, so ratios such as return on capital employed may be distorted by outdated asset values. Ratios can be calculated for any entity and do not remove accounting policy differences; in fact those differences reduce comparability.
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