Question

Ratio analysis is an important component of evaluating company performance. It can provide great insights into how a company matches up against itself over time and against other players within the industry. However, like many tools and techniques, ratio analysis has a few limitations and weaknesses. Which of the following statements represent a weakness or limitation of ratio analysis? Check all that apply. A firm may operate in multiple industries. Different firms may use different accounting practices. A firm’s financial statements show only one period of financial data.

Answer 1

Answer:

Different firms may use different accounting practices.

Explanation:

Financial ratios are ratios that summarises financial information and can be used in comparison of performance of companies.

Types of financial ratios :

1. Activity ratios

2. Liquidity ratios

3. Solvency ratios

4. Profitability ratios

5. Valuation ratios

If different accounting practices are used, it would result in different data. This can hamper comparison among companies