Question

1. You prepare a ratio analysis over a five year time horizon. Which ratio analysis would be effective to detect the false capitalization of expenses as long-term assets?
   1. Revenues / Long-term assets
   2. Expenses / Long-term assets
   3. Both a and b

Answer 1

Answer: Option b) Expenses / Long-term assets

Explanation:

Ratio analysis is a technique of financial analysis and high current ratio implies heavy investment in current assets. It describes the relationship between various items of balance sheet and income statements to express the fraction, proportion and percentage in times.

It shows budgetory control by accessing qualitative relationship among different financial variables for any deffects or errors recorded in the balance sheet or Income statement.

Effective to detect the false capitalization of expenses as long-term assets is Expenses / Long-term assets.

Thus, Option b) is correct and remaining options are incorrect.