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What are the limitations of using ratios for financial state

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What are the limitations of using ratios for financial statement analysis?
What are the benefits? Will different user groups focus on different ratios? Why or why not?
Which ratios would you use to analyze a company? Why?

What does full disclosure mean?
How does full disclosure affect financial reporting?
Are there any ethical implications to what must be reported in order to comply with full disclosure? Explain.
What recommendations would you make to management regarding what must be disclosed?

What information is provided in the auditors' report?
Does the audit report offer any guarantees? Explain.
What do you think the general public believes the auditors are providing in the audit report?

What information is contained in the balance sheet?
What are limitations of the balance sheet?
How can balance sheet limitations be overcome?

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Solution Preview

What are the limitations of using ratios for financial statement analysis?
What are the benefits? Will different user groups focus on different ratios? Why or why not?
Which ratios would you use to analyze a company? Why?

What does full disclosure mean?
How does full disclosure affect financial reporting?
Are there any ethical implications to what must be reported in order to comply with full disclosure? Explain.
What recommendations would you make to management regarding what must be disclosed?

What information is provided in the auditors' report?
Does the audit report offer any guarantees? Explain.
What do you think the general public believes the auditors are providing in the audit report?

What information is contained in the balance sheet?
What are limitations of the balance sheet?
How can balance sheet limitations be overcome?

Solution:

What are the limitations of using ratios for financial statement analysis?
There are serious limitations to using ratios for financial statement analysis. The ratio use assumes that all material transactions have been recorded, and are a part of the company's financial statements. This oftentimes is not the case, and the financial ratios therefore are not accurate as to the company's actual state of financial condition. Also, financial ratios cannot really determine what the future will be like financially, for the company. Particularly in today's economic environment, where gas can go up almost $1 in a matter of two days, financial ratios aren't any more solid of a predictor on performance than any other prediction measure used.

What are the benefits?
There are many benefits. In my opinion, the biggest benefit to ratio analysis is for comparison analysis. With ratios for financial statement analysis, an accountant can use the current ratios, and perform an analysis to compare the ratios ...

Solution Summary

What are the limitations of using ratios for financial statement analysis?
What are the benefits? Will different user groups focus on different ratios? Why or why not?
Which ratios would you use to analyze a company? Why?

What does full disclosure mean?
How does full disclosure affect financial reporting?
Are there any ethical implications to what must be reported in order to comply with full disclosure? Explain.
What recommendations would you make to management regarding what must be disclosed?

What information is provided in the auditors' report?
Does the audit report offer any guarantees? Explain.
What do you think the general public believes the auditors are providing in the audit report?

What information is contained in the balance sheet?
What are limitations of the balance sheet?
How can balance sheet limitations be overcome?

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