Finance question?

Question

Which of the following statement about financial ratios is INCORRECT?
(A) according principles & methods used by a company will not affect financial ratios.
(B) the infomational value of a ratio in isolation is limited.
(C) a ratio is one number expressed as a percentage or fraction of another number
(D) calculation of financial ratios is not sufficient for a complete financial analysis of a company

From my point of view, A&B are incorrect. Can you tell me your answer?

Answer 1

(A) is definitely incorrect. Just for your reference, I've attached an excellent article titled Limitation of Ratio Analysis. In it you'll find Different Accounting Policies as one fo the limitations. The choices of accounting policies may distort inter company comparisons. Example IAS 16 allows valuation of assets to be based on either revalued amount or at depreciated historical cost. The business may opt not to revalue its asset because by doing so the depreciation charge is going to be high and will result in lower profit.

Just click on the link for the whole article.

Answer 2

I'm voting for A

It will certainly affect the ratios. Imagine if you can classify any of the balance sheet items and put it as whatever you want it to become. If you can change the classification of the BS items, dont you think that everybody will have different ratios? For example, should you classify swap obligations (financial derivatives) as Liabilities? or do you want to classify it as "off BS items?" any of your decision, it will certainly affect the Debt/Equity Ratio.

B - true. basically B is similar to D. you can't use financial ratios alone to make a conclusion of the company's financial "status". You need more than that, such as cash flow analysis, valuation, etc. It's true that ratios are important but they need to be paired up with other kinds of measurement.

C - that's why you have the divider!!!

Just my thought. Hope this helps