Limitations of ratio analysis, Accounting Basics

Assignment Help:

Limitations of Ratio Analysis:  In spite of the a variety of uses of ratio analysis, it go through from certain limitations, some of which are as under;

1.    Limited use of a single ratio: A single ratio does not express any meaning. Ratios are helpful only when calculated in sufficient numbers.

2.    Lack of adequate standards:  It is not easy to set ideal ratios for each firm/ industry.  And moreover setting of typical ratios for all the firms in each industry is hard.

3.    Inherent limitations of accounting: As Ratio analysis is based on financial statements, the analysis suffers from the limitations of financial statements.

4.    Change of   accounting procedure:  If different methods are followed by dissimilar firms for their evaluation, contrast will virtually be of no use.

5.    Window dressing:   Ratios based on dressed up   (manipulated) financial information are not of a lot use as they illustrate unreliable position of the firm

6.    Personal bias:   different people will understand the similar ratio in dissimilar ways. Therefore, there is always the option that interpretation of the data may be dissimilar for dissimilar people, and this in revolve may result in many inferences for the similar data, which may be confusing.

7.    Price level changes are not offered for in ratio analysis which might lead to a misleading interpretation of business operations

8.    Ignorance of qualitative factors:  Ratios are tools of quantitative analysis only and usually qualitative factors which may usually manipulate the termination, (ex - a high current ratio May not necessarily mean sound liquid position when current assets comprise a huge inventory consisting typically of out of date items) are unseen while they are planned.


Related Discussions:- Limitations of ratio analysis

Books of original entry, how is withdrawaL OF goods by owner for personal u...

how is withdrawaL OF goods by owner for personal use treated in the books

What is passage of title in transpotation, Q. What is Passage of title in t...

Q. What is Passage of title in transpotation? Passage of title is a term that point to the transfer of the legal ownership of goods. Title to the goods usually passes from sell

Choosing an accounting career, Q. Choosing an accounting career? How co...

Q. Choosing an accounting career? How companies have a choice in inventory cost methods among specific identification, LIFO, FIFO and weighted-average. Likewise one of the grea

Procedure for testing , What is procedure for testing after implementation ...

What is procedure for testing after implementation as functional consultant? Ans) Testing involves a step by step check of several transactions configured in the SAP system.

Management, briefly explain management process

briefly explain management process

Explain about purchase returns and allowances, Q. Explain about Purchase re...

Q. Explain about Purchase returns and allowances? Purchase returns and allowances A purchase return takes place when a buyer returns merchandise to a seller. When a buyer recei

Antidilution of ownership, Antidilution of Ownership The right of an i...

Antidilution of Ownership The right of an investor is to continue the same percentage ownership of an organizations main stock in the event that the organization issues more s

Rent account, i need to pay rent for 3 year 2011,2012,and 2013. am in 2012 ...

i need to pay rent for 3 year 2011,2012,and 2013. am in 2012 1 December. what entries will be there for rent account and the rant account balance amount

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd