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.

Question

BlackTom AI · Accepted Answer

Consider the question about limitations of ratio analysis and examine each statement carefully.
Option a: I, II and III. This choice includes II, which claims that ratio analysis ignores quantitative factors. In reality, ratio analysis relies on quantitative financial data from statements; thus this statement is incorrect. Including II makes this option invalid.
Option b: II, III and IV. This option also includes II, which is false for the same reason that ratio analysis uses quantitative data. Therefore this option mischaracterizes the method and is not correct.
Option c: I, III and IV. This set lists I (ratio analysis ignores qualitative factors) as true, III (ratio analysis is historical analysis) as true, and IV (financial statements are subject to manipulation and therefore so are the ratios based on them) as true. All three points align with common criticisms: qualitative aspects are not captured by many ratios, ratios reflect past data rather than forward-looking information, and if the underlying statements are manipulated, the derived ratios can be distorted as well.
Option d: I, II and IV. This option includes II (ignores quantitative factors), which is false because ratio analysis is fundamentally quantitative. The presence of a false statement renders the whole option incorrect.
In summary, only option c correctly identifies the true limitations (I, III, and IV) while the others include at least one incorrect assertion, making them invalid.

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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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 so are the ratios based on them.

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