Two firms in the same industry are the same size and have very similar real-world financial results. Which of the following describes the profitability ratios of these firms?
A) They could be very different because ratios are based on projections of future performance rather than on actual real-world performance.
B) They should be identical because regulations require all firms in the same industry to use the same accounting methods to construct their financial statements and compute their key financial ratios.
C) They should be very similar because both firms must use exactly the same mathematical formulas to calculate their ratios.
D) They could be different if they used approved but dissimilar methods to construct their financial statements.

Question

Quizplus · Accepted Answer

Profitability ratios can be different for two firms even if they are in the same industry and have similar financial results if they use approved but dissimilar methods to construct their financial statements. The way in which expenses and revenues are recognized can have a significant impact on profitability ratios. However, the use of approved accounting methods ensures that the ratios are based on comparable information.

Two Firms in the Same Industry Are the Same Size