When should an average amount be used for the numerator or denominator?

Question

Quizplus · Accepted Answer

When a ratio consists of an income statement item and a statement of financial position item, using an average amount for the numerator or denominator can provide a better representation of the company's overall financial health. This is because income statement items are typically measured over a period of time and statement of financial position items are measured at a specific point in time. By averaging the income statement item over the same period of time, the resulting ratio will be more meaningful.

When Should an Average Amount Be Used for the Numerator