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Question
State any two limitations of ratio analysis.
Solution
Ratios are only means: Ratios are not ended in themselves but they are only means to achieve a particular purpose. Analysis of related items must be done by the management or experts with the help of ratios. Change in price level: Ratio analysis may not reflect price level changes and current values as they are calculated based on historical data given in the financial statement.
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RELATED QUESTIONS
Bring out the limitations of ratio analysis.
Ratio Analysis helpful in:
Limitations of Ratio Analysis:
Ratio Analysis Price level changes:
Ratio Analysis ignored
Ratio Analysis affected by:
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.
