1 page/≈275 words
Business & Marketing
FMA-II 2 of 3: Ratio Analysis (Essay Sample)
Explain the weaknesses of ratio analysis. Your response should be at least 250 words in length. You are required to use at least your textbook as source material for your response. All sources used, including the textbook, must be referenced; paraphrased and quoted material must have accompanying citations. source..
Although ratio analysis constitutes a very valuable tool for financial statement users, it is associated with several weaknesses. To begin with, ratio analysis tend to be misleading when it is used to analyze financial accounting data generated using accounting standards that incorporate diverse accounting policies. As such, assumptions and estimates made during the compilation of such accounting information impair the comparability of such data, thereby rendering ratio analysis ineffective. Secondly, ratio analysis only helps to demonstrate the past performance of firm rather than providing insight into the present and future performance of an organization. Consequently, ratio analysis is ineffective in revealing the position of a firm among competitors and providing current information to the users (Lasher, 2011).
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