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One of the great things about ratio analysis is the ability to compare against prior information....

One of the great things about ratio analysis is the ability to compare against prior information. In accounting roles, I have utilized this to help in current evaluation of companies. However, we also have to understand that there are challenges in comparing information from different time periods. What are some of those challenges?

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Answer #1

1. Accounting Policies: Choice of accounting policies while preparing financial statement affects its comparison.

2. Cause of changes: : ratios only depicts what change occurred,but fails to reason behind change.

3. Book value constrain: As financial statements are based book value most of the places.they fails to reflect market values.

4. Management quality measurement: Ratios are based on financial statements, hence they don not tell management quality and experience.

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