Question

discuss two factors that limit the usefulness of financial accounting information for ratio analysis

Answer 1

#ANSWER:

# Ratio Analysis

Ratio analysis is a popular technique of financial analysis. It is used to visualize and extract information from financial statements. It focuses on ratios that reflect the profitability, efficiency, financing leverage, and other vital information about a business.

One of the key factors in ratio analysis is the comparison to the benchmark companies of an industry.

# factors that limit the usefulness of financial accounting information for ratio analysis.

Inflationary effects: Financial statements are released periodically and, therefore, there are time differences between each release. If inflation has occurred in between periods, then real prices are not reflected in the financial statements. Thus, the numbers across different periods are not comparable until they are adjusted for inflation.

Changes in accounting policies: If the company has changed its accounting policies and procedures, this may significantly affect financial reporting. In this case, the key financial metrics utilized in ratio analysis are altered and the financial results recorded after the change are not comparable to the results recorded prior to the change. It is up to the analyst to be up to date with changes to accounting policies. Changes made are generally found in the notes to the financial statements section