Question : Which statements are correct for limitations of ratio analysis?
a. Ratio analysis may result in false results if variations in price levels are not considered.
b. Ratio analysis ignores qualitative factors.
Option 1: Option A
Option 2: Option B
Option 3: Both of the above are correct
Option 4: None of the above
Correct Answer: Both of the above are correct
Solution :
To gain a general understanding of a company's results, financial positions, and cash flows, ratio analysis can be used to compare information from financial statements. However, ratio analysis has some limitations: Accounting policies, inflation, operational changes, business conditions, and so on may cause some balance sheet elements to be stated at historical cost, resulting in unusual ratio results.
Hence option 3 is the correct answer.
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