Which of the following is/are limitations of ratio analysis?
A)use of acquisition cost for assets rather than current replacement cost or net realizable value
B)latitude firms have in selecting from among various generally accepted accounting principles
C)changes in many ratios correlate with each other
D)must recognize conditions that have changed between the periods being compared when comparing the size of a ratio between periods for the same firm
E)all of the above

Question

Quizplus · Accepted Answer

All of the listed options are limitations of ratio analysis. The use of acquisition cost instead of current replacement cost or net realizable value can result in misleading ratios. The latitude firms have in selecting accounting principles can also lead to varying ratios. Changes in many ratios can correlate with each other, making it challenging to interpret them in isolation. Finally, to accurately compare the size of a ratio between periods for the same firm, one must recognize any conditions that have changed between those periods.

Which of the Following Is/are Limitations of Ratio Analysis