CFA Level I · CFA Level I Exam · Financial Analysis Techniques
Which of the following is the most likely limitation of using ratio analysis based on a single year-end balance sheet for a seasonal business?
Year-end balances may not represent average conditions during the year. A seasonal business can have unusually low or high inventory, receivables or borrowings at year-end, so ratios from that single date may distort liquidity and efficiency. Using averages or quarterly data reduces this problem.
- AYear-end balances may not represent average conditions during the yearCorrect
- BRatios cannot be computed from financial statements
- CRatios always overstate profitability
Explanation
Seasonal firms may have year-end balances, such as inventory or receivables, that differ greatly from their typical levels. Ratios using year-end values can therefore mislead, and averages or interim data help. The other options are incorrect generalizations.
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