Question

Write short notes on Limitations of Ratio Analysis.

Answer 1

limitations of ratio analysis

1) false results;_ ratio are calculated from the financial statements show the liability of ratio and its analysis is depend up to the correctness of financial statement

2) qualitative factor are ignored; ratio analysis is the technique of qualitative analysis and does ignore qualitative factor which may be important in decision making

3) lake of standard ratio; there is no single standard ratio against which the ratio can be compared

4) price level changes are not considered; change in price level affect the comparability of the ratio but the price level change are not considered in accounting variable from which ratio are computed this handicaps and and utility of accounting ratio

5) window dressing; ratio may be affected by window dressing men population of account is a way of concern 12th Fact and present the financial deposit better than what it actually is on account of search a situation presence of particular ratio may be defined indicator of good or bad management

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