de.docx - D(1 Ratios are based on accounting figures given in the financial statements However accounting figures are themselves subject to deficiencies

de.docx - D(1 Ratios are based on accounting figures given...

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D (1) Ratios are based on accounting figures given in the financial statements. However, ac- counting figures are themselves subject to deficiencies, approximations, diversity in practice or even manipulation to some extent. Therefore, ratios are not very helpful in drawing reliable conclusions. (2) Ratios have inherent problem of comparability. Companies otherwise similar may employ different accounting methods, which can cause problems in comparing certain key relationships. For example, inventory turnover can be different for a company using FIFO than for the other company using LIFO method of inventory valuation. (3) (3) Inflation may limit the utility of accounting ratios. Due to inflation, historical cost-based financial statements and accounting figures do not reflect current value figures, especially in the case of assets purchased at different dates by the different enterprises. Since financial statements are not adjusted in terms of inflation effect, accounting ratios calculated (using varying cost or prices) have distortions and become deceptive. Sometimes, gains (reflected
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  • Fall '18
  • muhia

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