Question

A change in price level makes analysis of _______ of different accounting year meaningless because accounting records ignore changes in value of money.

• A. Financial statement
• B. Government statement
• C. Company statement
• D. None of the above

Answer 1

Answer: (A)

Financial statement

One of the main limitation of ratio analysis is ignorance of price-level changes. The financial accounting is based on stable money measurement principle. It implicitly assumes that price level changes are either non-existent or minimal. A change in the price-level makes analysis of financial statement of different accounting years meaningless because accounting records ignores changes in value of money.