Question

“Accounting ratios ignore qualitative factors and are also not comparable if different firms follow different accounting policies.”

Answer 1

Ratio analysis is a quantitative evaluation of a business’s success. It misses qualitative factors. When analysing a customer’s creditworthiness, financial statements alone may not be enough to give credit. The customer’s character and intention to pay must also be considered. Different firms use different accounting policies for inventory valuation, asset life estimation, and depreciation methods (e.g., Straight Line or Written Down). Adopting different policies by firms might lead to inconsistent data and misleading findings when compared.