Reading 35: Financial Analysis Techniques-LOS b 习题精选 2011, limitation, following, likely, center

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Session 8: Financial Reporting and Analysis: The Income Statement, Balance Sheet, and Cash Flow Statement
Reading 35: Financial Analysis Techniques

LOS b: Describe the limitations of ratio analysis.

 

 

Which of the following reasons is least likely a valid limitation of ratio analysis?

A) It is difficult to find comparable industry ratios.

B) Calculation of ratios involves a large degree of subjectivity.

C) Determining the target or comparison value for a ratio is difficult.

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There is not a great deal of subjectivity involved in calculating ratios. The mechanical formulas for the calculations are fairly standard and objective for the activity, liquidity, solvency, and profitability ratios, for instance. On the other hand, determining the target or comparison value for a ratio is difficult as it requires some range of acceptable values and that introduces an element of subjectivity. Conclusions cannot be made from viewing one set of ratios as all ratios must be viewed relative to one another in order to make meaningful conclusions. It can be difficult to find comparable industry ratios, especially when analyzing companies that operate in multiple industries.

 

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Ratio analysis is most useful for comparing companies:

A) in different industries that use the same accounting standards.

B) that operate in multiple lines of business.

C) of different size in the same industry.

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Ratio analysis is a useful way of comparing companies that are similar in operations but different in size. Ratios of companies that operate in different industries are often not directly comparable. For companies that operate in several industries, ratio analysis is limited by the difficulty of determining appropriate industry benchmarks.

gaoflex

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