Question

1. What is the difference between cross-sectional and time-series ratio analysis? What is benchmarking?

2. When performing cross-sectional ratio analysis, the analyst should pay primary attention to what types of deviations from the norm? Why?

3. Why is it preferable to compare ratios calculated using financial statements that are dated at the same point in time during the year?

Answer 1

In cross sectional ratio analysis, various ratios are measured and compared with the benchmark or with the industry average while in case of time series ratio analysis, relationship between financial variables are measured over a period of time or trends are found over a period in a particular ratio. bench marking refers to setting up of standards or ideal or it is called a standard situation, bench marking is used to measure the performance and compared with the actual results.

The analyst should devote primary attention to any significant deviations from the norm, because whether the deviation is above or below the standard. A Positive deviations from the norm are not always favorable and it may leads to some serious problems so it should further be analyzed or investigated.

This may leads to misleading results due to change in values of various items of position statement like cash,inventory and on various current assets and liabilities due to seasonality factor.