Question

Which of the following statements is not a limitation of ratio analysis? A There are an...

Which of the following statements is not a limitation of ratio analysis?

A There are an insufficient number of ratios available.
B Seasonal factors can distort ratios.
C Different organizations can use different, but allowed under generally accepted accounting principles (GAAP), accounting conventions.
D It often is hard to tell whether a given ratio is “good” or “bad.”
E Inflation effects can distort ratios.
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Homework Answers

Answer #1

Answer is Option A.

Option A is an untrue statement. There are a wide number of ratios available based on the type of firm and analysis that you want to perform.

Option B is correct. Seasonality distorts the periodic ratios and make them less comparable.

Option C is correct. Different methods or accounting conventions used in different periods by a firm or in same period by different firms make ratios less comparable.

Option D is a limitation.

Option E. Inflation does play a spoilsport while maintaining financial analysis.

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