Economics · Accounting Ratios
A major challenge in using Accounting Ratios for comparing two companies is the potential for different accounting policies. Which of the following is the most significant limitation of accounting ratios in the context of inter-firm comparison?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The lack of standardization and use of varying definitions (e.g., different depreciation methods or inventory valuation) can make comparisons between companies' ratios misleading.✓
- 2Ratios are always based on the historical cost concept, which makes them irrelevant during periods of high inflation.
- 3Ratios fail to reflect qualitative factors such as management competency or political environment.
- 4Ratios are based on publicly available data, making them susceptible to manipulation by market forces.
Correct answer
The lack of standardization and use of varying definitions (e.g., different depreciation methods or inventory valuation) can make comparisons between companies' ratios misleading.
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