Accounting Discussion

There are some inherent problems and limitations to ratio analysis that necessitate care and judgment.   Ratios are often not useful for analyzing the operations of large firms that operate in many different industries because comparative ratios are not meaningful. The use of industry averages may not provide a very challenging target for high-level performance. Inflation affects depreciation charges, inventory costs, and therefore the value of both balance sheet items and net income.  For this reason, the analysis of a firm over time, or a comparative analysis of firms of different ages, can be misleading. Ratios may be distorted by seasonal factors, or manipulated by management to give the impression of a sound financial condition (window dressing techniques). Different operating policies and accounting practices, such as the decision to lease rather than to buy equipment, can distort comparisons. Many ratios can be interpreted in different ways, and whether a particular ratio is good or bad should be based upon a complete financial analysis rather than the level of a single ratio at a single point in time. Discuss on the above topics and have your input. Discussion prompt, resource or idea/example