Which of the following are limitations of ratio analysis? I. Ratio analysis ignores qualitative factors II. Ratio analysis ignores quantitative factors III. Ratio analysis is historical analysis. IV. Financial statements are subject to manipulation and so are the ratios based on them.

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Question restatement: Which of the following are limitations of ratio analysis? I. Ratio analysis ignores qualitative factors II. Ratio analysis ignores quantitative factors III. Ratio analysis is historical analysis. IV. Financial statements are subject to manipulation and so are the ratios based on them.

Option A: a. I, III and IV
- This combination asserts that the limitations are I, III, and IV. Item I is true because ratio analysis often overlooks qualitative factors like management quality, brand strength, or market conditions. Item III is true since ratio analysis typically examines past financial statements, i.e., historical data. Item IV is true because financial statements can be manipulated (e.g., earnings management), which in turn affects the derived ratios. Taken together, these three points accurately reflect common limitations of ratio analysis.

Option B: b. II, III and IV
- Here II claims that ratio analysis ignores quantitative factors. This is incorrect because ratio analysis is fundamentally built on quantitative financial data (numbers from the financial statements). Therefore, asserting that it ignores quantitative factors misrepresents what ratio analysis does, making this option flawed. The inclusion of III and IV is accurate, but the presence of the false statement II undermines the overall claim.

Option C: c. I, II and III
- This option includes II, which is the erroneous claim that ratio analysis ignores quantitative factors. Since ratio analysis relies on quantitative figures, II is false. While I and III are true (qualitative factors are often neglected and analysis is typically historical), the combination is invalid due to the incorrect II.

Option D: d. I, II and IV
- This choice again incorporates II, the incorrect assertion about ignoring quantitative factors, which makes the statement false overall. Although I and IV are true, the inclusion of the false claim II renders this option incorrect.

Summary perspective: The core correct understanding is that ratio analysis does rely on quantitative data and is largely historical in nature, while qualitative factors and data integrity concerns (manipulation) are notable limitations. Among the given options, only the combination that excludes the incorrect claim about ignoring quantitative factors aligns with these interpretations.

MCD2150 - T2 - 2025 Week 6 Workshop 1 quiz

Which of the following are limitations of ratio analysis? I. Ratio analysis ignores qualitative factors II. Ratio analysis ignores quantitative factors III. Ratio analysis is historical analysis. IV. Financial statements are subject to manipulation and so are the ratios based on them.

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Which of the following are limitations of ratio analysis? I. Ratio analysis ignores qualitative factors II. Ratio analysis ignores quantitative factors III. Ratio analysis is historical analysis. IV. Financial statements are subject to manipulation and therefore so are the ratios based on them.

Which of the following are limitations of ratio analysis? I. Ratio analysis ignores qualitative factors II. Ratio analysis ignores quantitative factors III. Ratio analysis is historical analysis. IV. Financial statements are subject to manipulation and therefore so are the ratios based on them.

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