Question

Which of the following are limitations of ratio analysis?
a. Ratio analysis may result in false result if variation in price levels are not considered.
b. Ratio analysis ignores qualitative factors.
c. Ratio analysis ignores quantitative factors.
d. Ratio analysis is historical analysis

• A. a, b, and d
• B. a, c, and d
• C. a, b and c
• D. a, b, c, d

Answer 1

Answer: (A)

a, b, and d

Ratio analysis can be used to compare information taken from the financial statements to gain a general understanding of the results, financial positions and cash flows of business. However there are some limitations of ratio analysis - some elements of balance sheet may be stated at historical cost this disparity can result in unusual ratio results, Accounting policies, inflation, operational changes, business conditions etc.