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31 January, 10:13

Which of the following statements represent a weakness or limitation of ratio analysis? Check all that apply. Ratio analysis is conducted using benchmarking techniques. A firm's ratios can lead to conflicting conclusions-some ratios might be ""good"" and some ""bad."" Inflation can distort balance sheet data.

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  1. 31 January, 10:21
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    The applicable answers are:

    A firm's ratio can lead to conflicting conclusions

    Inflation can distort balance sheet data

    Explanation:

    The fact that ratio analysis is conducted using bench-marking techniques implies that a business is compared with a best-in-class company that the business can learn best practices, hence that is on a positive note.

    Secondly, the issue around conflicting ratio conclusions is a valid weakness ratio analysis. For example having higher than industry average current ratio is a good indicator of liquidity and could also mean the inventory that accounts for a larger percentage of current assets is slow moving

    Inflation is another valid limitation as $1 last year is not necessarily the same this year.
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