Question

WhatsApp File Edit View Chat Window Help A ARC 55% ) Why do differences in the accounting practices of firms limit the usefulness of financial ratios? TT TT Paragraph Arial 3112t

Answer 1

Why do the difference in accounting practice effect/limit the use of financial ratio for comparability?

There is an inherent problem of comparability in Financial ratios due to use of different accounting principles by otherwise similar companies.
It causes critical problems in comparison of key relationships

Like: 1. Inventory measuring can differ due to the use of LIFO by some companies and FIFO by other companies.
2. Depreciation measuring can differ due to the use of SLM by some companies and the declining method by other companies.
3. treatment of extraordinary items.

There is a different amount computed by different methods which cause chaos compatibility of Financial ratios even among companies in a similar industry and thus limits its use.