Question

Lala Ltd. and Bala Ltd. use different accounting policies for inventory valuation. These variations leave a big question mark on the cross-sectional analysis and comparison of these two firms was not possible.

Identify the limitation of the Ratio Analysis highlighted in the above situation. Also, explain any two other limitations of Ratio Analysis apart from the identified above.

Answer 1

Variations of Accounting Practice as Limitation is highlighted in the given statement.

Other Limitations -

1. Limitations of Accounting Data
2. Ignores Price-level Changes
3. Ignore Qualitative or Non-monetary Aspects
4. Forecasting