alleryStart learning →What is the honest limit of what ratio analysis can tell a manager?
AIt proves that problems exist
BIt predicts future performance
CIt only highlights potential problems
DIt replaces the financial statements
Answer & Solution
Correct answer: C. It only highlights potential problems
1. Ratio analysis is based on historical data and may not indicate future financial performance.
2. It merely highlights potential problems and does not prove that they exist.
3. What it does well is let managers monitor performance from period to period and identify trouble spots.
4. Treating a weak ratio as proof of a problem overstates the tool, and treating it as a forecast ignores that it looks backward.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 14 "Using Financial Information and Accounting", section 14.7 Analyzing Financial Statements_
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