Which of the following is a limitation of ratio analysis?
A) Ratios depend on accounting data based on historical costs.
B) Differences in accounting practices like FIFO versus LIFO make comparison difficult.
C) Trend analysis could be distorted by financial statements affected by inflation.
D) All of the above are limitations of ratio analysis.

Question

Quizplus · Accepted Answer

All of the options A, B, and C are limitations of ratio analysis. Ratios are based on historical accounting data which may not be relevant or accurate for current market conditions. Moreover, differences in accounting practices like FIFO versus LIFO may result in misleading comparisons. Finally, trend analysis could be distorted if the financial statements are affected by inflation.

Which of the Following Is a Limitation of Ratio Analysis