Observation

Majority of the candidates that attempted this question on accounting ratio analysis and the performance was impressive. Few candidates lose marks due to wrong answers on the limitations of ratio analysis. Some of the responses expected were:

(i.)Differences in accounting policies may detract from the value of inter-firm companies;

(ii) It could be distorted as a result of ‘one off’ transactions;

(iii)Where a business undertakes a mix of activities, it is important to calculate separate ratios for each section whenever possible;

(iv) Special care is required when interpreting ratios calculated for seasonal business;

(v) Significant non-monetary items are excluded in the financial statements;

(vi) Financial statements are usually based on historical cost;

(vii)A deterioration in accounting ratios cannot necessarily be interpreted as a result of poor management; .

(viii)External users ability to obtain further information in addition to computed ratios varies considerably.

(ix)The effect of inflation limits the use of ratios when different periods are compared.

(x)Misleading comparisons arise if ratios are not calculated uniformly. .

(xi)External users may not have the ability to calculate ratios because published accounts do not disclose sufficient information for the interpretation. .