Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used similar accounting methods.

Question

Quizplus · Accepted Answer

Variations in accounting methods can result in differences in the way financial information is presented, which can affect the interpretation of financial ratios. For example, one firm may use LIFO accounting for inventory, while another may use FIFO accounting. This can result in different inventory values that affect ratios such as inventory turnover and gross profit margin. Therefore, significant variations in accounting methods can make meaningful ratio comparisons between firms more difficult.

Significant Variations in Accounting Methods Among Firms Make Meaningful Ratio