Limitations of Ratio Analysis - Thota Nagaraju BITS-Pilani Hyderabad Campus
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Questions and Answers

What do ratios provide for financial statement analysis?

  • Raw information
  • Performance recommendations
  • Deeper context (correct)
  • Clear conclusions

    • In ratio analysis, what must an analyst compare the calculated ratios with?

  • Financial standards (correct)
  • Investment options
  • Economic forecasts
  • Market trends

    • Which of the following is cited as a possible standard for comparing calculated ratios during analysis?

  • Economic indicators
  • Government regulations
  • Share price trend
  • Industry average (correct)

    • Which ratio indicates the profitability attributable to common shareholders?

    <p>Earnings per share of common stock</p> Signup and view all the answers

    What metric would be used to evaluate a firm's profitability from the financial statements?

    <p>Rate of return on assets</p> Signup and view all the answers

    In ratio analysis, what do earnings per share of common stock represent?

    <p>Profitability per unit of stock</p> Signup and view all the answers

    What is another name for the quick ratio?

    <p>Acid test ratio</p> Signup and view all the answers

    Why do some analysts criticize the current ratio and quick ratio for measuring short-term liquidity risk?

    <p>They rely on balance sheet amounts at a specific time</p> Signup and view all the answers

    What is a potential issue with companies 'window dressing' financial ratios?

    <p>It distorts the true financial position</p> Signup and view all the answers

    What impact can using unusually large or small balance sheet amounts at a specific time have on current and quick ratios?

    <p>It distorts their accuracy</p> Signup and view all the answers

    Which ratio helps overcome the deficiencies of the current ratio and quick ratio due to the use of balance sheet amounts?

    <p>Cash Flow from Operations to Current Liabilities Ratio</p> Signup and view all the answers

    Which financial statement data input can companies manipulate to 'window dress' ratios?

    <p>Inventory</p> Signup and view all the answers

    What is one of the limitations of ratio analysis discussed in the text?

    <p>Ratios can be affected by changes in accounting principles.</p> Signup and view all the answers

    Why might changes in many ratios correlate with each other, according to the text?

    <p>Due to changes in accounting principles.</p> Signup and view all the answers

    In what situations might a financial analyst not need to compute all ratios for a particular dimension of profitability or risk?

    <p>When assessing a particular dimension of profitability or risk.</p> Signup and view all the answers

    How does the use of acquisition cost for assets instead of current replacement cost or net realizable value affect ratio analysis, based on the text?

    <p>It can introduce shortcomings into ratio analysis.</p> Signup and view all the answers

    When comparing the size of a ratio between periods for the same firm, what does the analyst need to consider?

    <p>Different product lines served.</p> Signup and view all the answers

    Which factor may not influence changes in ratios according to the text?

    <p>Different product lines served.</p> Signup and view all the answers

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