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Limitations ratio analysis: cross-sectional, time-series

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Discuss the limitations of ratio analysis and the cautions which must be taken when reviewing a cross-sectional and time-series analysis.

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Cross sectional analysis, looking at current period for multiple firms or areas of the business,

Ratios use financial statement data and those data can have misleading distortions such as one-time events and changes to the product mix. They are also summaries and so diverse actions can offset and not trigger an unusual ratio amount. For instance, one segment of the business can be ...

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Your discussion is 251 words and mentioned four major limitations.

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Financial Statement Analysis, Flexible Budget

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R.J. Falk is the chief executive officer of Ventura Electronics. Falk is an expert engineer but a Novice in accounting. Falk asks you, as an accounting major, to explain a) the bases for comparison in analyzing Ventura financial statements and (b) the limitations, if any, in financial statement analysis.
Write a memo to R.J. Falk that explains the basis for comparison and the factors affecting quality of earnings. Include a 350-700-word memo addressing the problem

Preparing a Flexible Budget
The flexible budget at the 70,000-unit and the 80,000-unit levels of activity is shown below.
70,000 Units 80,000 Units 90,000 Units
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,400,000 $1,600,000 $
Cost of goods sold . . . . . . . . . . . . . . . . . . . . 840,000 960,000
Gross profit on sales . . . . . . . . . . . . . . . . . . . $ 560,000 $ 640,000 $
Operating expenses ($90,000 fixed) . . . . . . . 370,000 410,000
Operating income . . . . . . . . . . . . . . . . . . . . . $ 190,000 $ 230,000 $
Income taxes (30% of operating income) . . . 57,000 69,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 133,000 $ 161,000 $
Complete the flexible budget at the 90,000-unit level of activity. Assume that the cost of goods sold and variable operating expenses vary directly with sales and that income taxes remain at 30 percent of operating income.

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