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Question
It is a technique which involves regrouping of data by application of arithmetical relationships. Identify the technique and state any two limitations of the technique identified.
Solution
Ratio analysis is the technique which involves regrouping of data by application of arithmetical relationships.
Two Limitation:
- Absence of Standard Ratio: There are no standard ratios against which accounting ratios can be compared.
- Qualitative factors are not considered: Ratio analysis is a technique analysis. It ignores qualitative factors, which may be important in decision making.
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