Question

What is ratio analysis? Explain the purpose and usefulness of this analysis. What are the limitations of ratio analysis? What is the difference between a time-series analysis and a cross-sectional analysis? Is one preferred over the other?

Answer 1

Ratio analysis is a study of relationship between two financial variables, it check the degree of relationship between various financial variables and on the basis of which specific conclusion is drawn.

Ratio analysis is very much important because it set the relationship between financial variables and with the help of this relationship we can find cause and effect of a business decision on other variable and factors. Ratio analysis helps in finding out the impact of decision making on the various stakeholders, and financial position of the company.

There are some limitation of ratio analysis like these are static in nature and based on historical information and do not consider effect of inflation, changes in policies and changed business and regulatory environment

Major point of difference between time series analysis and cross sectional analysis is that in time series analysis analysis is made over a period of time while in cross sectional, analysis is made only at a point of time.

In accounting it is always preferable to use time series analysis as it provides information and trend over a period of time while in cross sectional analysis is made only at a point of time and we all know that business is a continuous process and its data is keep on changing so for exact analysis time series analysis is always preferred.