Which two of the following represent the most effective methods of directly evaluating the financial performance of a firm?
I. comparing the current financial ratios to those of the same firm from prior time periods
II. comparing a firm's financial ratios to those of other firms in the firm's peer group who have similar operations
III. comparing the financial statements of the firm to the financial statements of similar firms operating in other countries
IV. comparing the financial ratios of the firm to the average ratios of all firms located in the same geographic area
A) I and II only
B) II and III only
C) III and IV only
D) I and IV only
E) I and III only

Question

Quizplus · Accepted Answer

Comparing a firm's current financial ratios to those of the same firm from prior time periods (I) is an effective method of evaluating the financial performance of a firm as it shows trends and changes in the company's financials. Comparing a firm's financial ratios to those of other firms in the firm's peer group who have similar operations (II) is also an effective method as it benchmarks the company's performance against its competitors. Comparing the financial statements of the firm to the financial statements of similar firms operating in other countries (III) and comparing the financial ratios of the firm to the average ratios of all firms located in the same geographic area (IV) are not as effective methods in evaluating financial performance as they do not provide a relevant comparison group.

Which Two of the Following Represent the Most Effective Methods